Dec 12, 2008
FirstCaribbean revenue, profit diminished
FirstCaribbean Inter-national Bank Limited (FCIB) is expected to report year-end profits that have fallen off by US$80 million or 31 per cent when its earnings report becomes available.
[ more . . . ]

Dec 10, 2008
Global crisis hits Agostini’s rights issue
Agostini’s Ltd has suffered a shortfall in its rights issue which closed on October 22, 2008.
[ more . . . ]

Dec 08, 2008
BSE not fearful of crisis
THE Barbados Stock Exchange (BSE) does not foresee any major impact on its operations as a result of the global financial crisis
[ more . . . ]

Dec 08, 2008
FirstCaribbean affected by global financial crisis
THE current global financial condition has significantly impacted the net income of one the largest banks in the Caribbean.
[ more . . . ]

<< Opinions and Analysis

Living With Inflation

April 29 , 2004

Inflation has generated lots of controversy over the past few weeks. There have been diverse debates ranging from what inflation really represents, is it increasing, by how much, what is an acceptable rate, what are its causes, is it preventable, who does it affect, the implications on the economy and much more.

But what about you, the individual who can neither directly affect the perceived causes of inflation nor control its overall impact. How does inflation affect you as an individual, trying to simultaneously enjoy a particular standard of living and at the same time set aside for you and your family’s future?

Rest assured that regardless of the level of inflation, it is certain to have a very real and significant impact on both the present and future quality of your life. Whenever you're calculating how much money you'll need in the near future or for retirement, and how much you need to save now you must consider the eroding effects of inflation. Inflation is a silent threat to your financial security. Regardless of the rate of inflation, regardless of how this rate is calculated you'll need to ensure your investment returns outpace inflation to protect your purchasing power in years to come.

A Layman’s Calculator

Persons who are ambivalent as to whether or not they should be investing their money or even worse those who are preoccupied with current consumption need only consider the Rule of 72. This formula makes it easy for everyone to gauge the impact of inflation and can also be used for calculating the power of a compounded return. It states that 72 divided by the rate of inflation gives a reasonable approximation for the number of years it will take for your expenses to double. So in our present scenario where it is suggested that an inflation range of 4% to 7% is acceptable, your expenses will arguably double some where between 10 to 18 years (72/4 = 18; 72/7 = 10.2).

It should now be very apparent that you may ignore inflation, but it won't ignore you. Do you expect your salary to double over the ensuing period outlined above? If not then inflation will cause your standard of living to fall. The situation becomes even worse if you are near or at retirement since the opportunities for increases in income become limited. Another point to note is the big difference a 1% change in inflation compounded over time makes to your standard of living. In this particular instance a range of just 3% translates into a difference of eight years in terms of the halving of your standard of living.

Choose Wisely

The above analysis identifies the rise in costs. If your salary does not match or outpace inflation then the only way to preserve your future spending power to overcome this rise in costs is by investing. There are persons who already have the presence of mind to invest their current earnings in order to generate a future return. Yet that by itself is not enough. You need to consider the type of investments in your portfolio as this is critical to a favourable investment outcome. If your investments fail to outpace inflation you would still not be able to secure the lifestyle that you desire.

To illustrate the point consider a basic investment scenario. Take $1,000 and place it in a deposit account at a financial institution for 1 year. Based on our current environment let’s assume a more than reasonable rate of 5% per annum. This means that you would be giving up $1,000 of current consumption for $1,050. Let us now assume that over the course of the year there is a steady inflation rate of 6% (which is below the 7% acceptable threshold recently set by Government), the purchasing power of $1,000 has decreased by $60. You have earned $50 but this still represents a net loss in purchasing power of $10. The above scenario depicts an erosion of your spending power despite a real and very commendable attempt to invest for your future.

Stocks Offer Hope

There can be no sitting on the fence. Ambivalence is not an option when it comes to securing your future. You must consider stocks as part of your investment portfolio. Granted stocks carry more risk than a simple deposit account, however it is possible through discussions with your broker and other financial advisors to manage this risk. Once this is done history has shown that stocks have over the long term been able to generate returns in excess of most other types of investments and certainly outpace inflation. The benefit to you is a higher rate of return and a greater likelihood that your purchasing power will be preserved or enhanced in the future.

The fact that the market is now at an all time high is no reason to stay out since there is every likelihood that once the fundamentals remain in place the market will continue to go higher. There are still lots of very good investment opportunities in the local stock market, especially for someone whose primary objective is to protect against inflation. In fact the market must be commended as it has moved at least for the time being from a period of exuberance to a more circumspect, orderly and rational environment where more attention is being paid to corporate performance.

Currently the biggest movers on the local market are the cross listed Jamaican companies and their movement has a lot to do with arbitrage opportunities arising from price appreciation in their home market. The Jamaican market has already returned an increase of over 50% for the year to date on the back of falling interest rates and a favourable economic outlook. Companies based in Jamaica are seeing their share prices rise in much the same way that our market moved from September 2003 to March 2004. Just as in Trinidad, the rate of capital appreciation in Jamaica should slow down, but the market is still expected to be positive over the next twelve months.

The preceding commentary should have placated any concerns regarding the state of the market and should open the door for you to take the time to invest. If you don’t want to be in a situation where your standard of living falls when you retire, contact your broker. It’s one of the steps on the way to securing your future.

Ian Narine is the General Manager at West Indies Stockbrokers Limited. He can be contacted at iann@wisett.com

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