Keeping Afloat

The Consumer Price Index is a weighted average of prices referring to a benchmark basket of consumer goods - food, clothing, tobacco, fuel, power, services, and rents - purchased by a household, theoretically defining a general living standard. An increasing index mirrors price increases, and therefore inflation.

Unfortunately, the CPI's rise has sped up. The latest six month average (Jan-Jun 2008, 150.9) is 7.5% against the same period last year, and 6% higher than 2007's annual average. A global phenomenon, a comparative five month CPI average (Jan-May) of 2007 and 2008 in the US shows a 4.07% increase.

Correspondingly, the double-digit 11.4% June 2008 headline inflation rate is up from 9.5% in May.

SUBSTITUTION, OMISSION

Inflation has sapped Juan's wage purchasing power. Consider rice, whose price has risen 27.7% since December. The reaction is belt-tightening, either by substitution or omission: Juan will first seek a cheaper, similar alternative. Without any, he will use less; in the extreme, none.

So why not simply increase wages? Wages are based on Core Inflation (CI): the CPI, but without the price shock susceptible commodities like food and oil. Wages have moved little because compared to 11.4% headline inflation, June Core Inflation is only 6.6%.

Its difficult to summarily increase wages, because it can break businesses, resulting in unemployment. The Left's perennial clamor for this should be avoided. The unsubstantiated wage hike would lead to food riots – like in Haiti and Bangladesh – and the semblance of disorder could tear the country apart.

Because in the short run, higher wages will counter high prices. In the Medium and long term though, the increased money supply, chasing limited goods and services, will drive prices upward.

In the Brazilian Hyperinflation crisis, by simplistically printing money, a wage-price spiral ensued. In 1980, the CPI and inflation rate ballooned from 4 at 100% inflation, to 2,472,400,000,000; a whopping 2,076% inflation, in 1994! Why? Because money must be based on something, like the original gold standard. Based on the strength of US economy fundamentals, the world shifted to the greenback. This has since weakened, and 61% of global trade is now dominated by other, emerging economies.

Here are a few tips to help turn adversity into opportunity.

#1 SAVE FUEL

Commuting and car-pooling saves fuel and transport-related expenses. But one of the indications that the middle-class is feeling the pump price pinch is that LRT and MRT riders have increased by about 22%.

Gasoline Station owners, collaborating with Government banks can establish LPG conversion centers, to enable the middle class, jeepney, and bus operators to convert their vehicles. Terms can be concessional, like 12% p.a. for P500,000 (sourced perhaps from the Php4 billion oil EVAT). The fuel expense savings alone will already offset the interest.

#2 SAVE ELECTRICITY

Generally electricity is generated by oil–fired plants. Its actually your personal gas-guzzler whose bill must be footed, monthly. Unplug, switch off. The plus: less consumption means more than just lower bills. Using less means we import less, thus conserving our country's dollar reserves.

#3 BUY LAND

Following the Filipino – Chinese formula, real estate won't match the speed of returns of stock investment, but it is the safest, surefire investment there is, for the next 13 to 18 months.

But use only spare cash, because the earnings come from land value appreciation, which happens gradually. Should you suddenly need cash, chances are you'd have to sell at a lower than market value just to liquidate your asset.

#4 INVEST IN COMMODITIES

Taipans who have not invested actively in commodities can catch the tail end of the speculative bubble, expected to burst in 6-8 months. This lucrative market can deliver huge revenues. Why should only Texans and Arab Sheikhs make a killing in the Oil futures markets? A word of advise: watch the oil, not the futures.

#5 CREDIT YOUR CARD

Assuming you have a constant income stream, credit cards are effective in stretching your budget, especially when matched with fuel rebates and 0% interest promos. But settle your bill in full, monthly; rather than pay minimum amounts. Card interest rates range from .98% to 3.25%, monthly; a Php1,000 purchase would therefore add Php98 to Php325, per month! Annualized, that translates to 11.76% to 39% per annum. Caveat Emptor!

More in the next article.

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