The financial year for some companies have ended and it is time for employees to be judged for the work performance which will affect their bonuses and pay increment. A friend brought up an interesting topic on pay increment vs inflation rate. He was also unsure how to inflation rate numbers came about. I thought that this was an interesting topic to talk about.
Inflation Rate:
The inflation rate in Singapore in 2011 was a 5.2%. In the recent quarter, it was reported that the inflation rate has dropped to 4.6% in February.
Source:
This is still considered high as compared to the past years (see below for inflation rate figures).
Time Series on CPI
(2009=100) and Inflation Rate
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Year
|
Consumer Price Index (2009=100)
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Annual Inflation rate
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2000
|
87.6
|
1.3
|
2001
|
88.4
|
1.0
|
2002
|
88.1
|
-0.4
|
2003
|
88.5
|
0.5
|
2004
|
90.0
|
1.7
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2005
|
90.4
|
0.5
|
2006
|
91.3
|
1.0
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2007
|
93.2
|
2.1
|
2008
|
99.4
|
6.6
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2009
|
100.0
|
0.6
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2010
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102.8
|
2.8
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2011
|
108.2
|
5.2
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Source: Singapore Department of
Statistics
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Last updated: 25 Jan
2012
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Extracted
from www.singstat.gov.sg
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The consumer price index (CPI) is used to determine the inflation rate. The CPI is a basket of goods that will include food, transport, housing, clothing etc. Basically they are things that an individual will typically spend on. The various items have a certain weight allocated to it. The total amount is then benchmark to the CPI in 2009 which is given a value of 100.
In 2010, the CPI was 102.8, indicating that the inflation rate is 2.8%
In 2011, the CPI was 108.2, indicating that the inflation rate is 5.2% [108.2/102.8]
So what does this basket of goods consists of? What's the weights on each item like?
The breakdown of the different items are shown below. Housing takes up a largest weight of 25%. Right behind housing is food which takes up 22%.
You may then ask: What about the detailed breakdown of each category?
For the food category, some people eat at hawker centres, some will eat in restaurants, some will cook themselves. How are each category computed?
A detailed breakdown is available on the same link listed above. I have extracted it here for easy reading:
To make things even simpler, let's assume we only use chicken rice as an indicator for inflation. If a plate of chicken rice cost $3.50 in 2010 and $3.70 in 2011, the inflation rate in 2011 will be 3.7/3.5 = 5.7%. In reality, some items would have increased to a lesser extent, and some items will have increased much more. The weighted average on the different category will help to give a more accurate indication to the actual "cost of living"
From the figures above, we can see that the category that has increased the most significantly is housing, followed by transport. Which is probably why we hear more and more Singaporeans ranting about the high housing costs and the ever increasing transport costs in Singapore.
My thoughts
Going back to the original topic of pay increment Vs inflation rate, if your pay had increased by 3% , you will find yourself saving lesser than what you could in the previous year even though your spending habits have not changed. Things in general now cost 5.2% more in 2011 as compared to 2010. Essentially, your spending power have declined. This means that your REAL WAGES have not increased; in fact, it has dropped.
Of course, I am not asking you to quit your job just because your pay increment is lesser than inflation. Inflation rates go up and down just like your wages. However, if your pay increment is lesser than the inflation rate, you need to be mindful about it and control your spending a little more. Otherwise, you will end up saving a lot lesser. Or even worse, you may end up spending more than what you actually earn.
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