Wondering why you are paying more for your favourite cup of coffee recently?
With keywords such as inflation and CPI hike appearing more frequently in the news lately, what does it mean and how will it affect you as a consumer?
Read more: 3 Effective Ways To Hedge Against Inflation
In this article, we will be exploring the following:
- What is the Consumer Price Index (CPI)?
- How to Interpret CPI?
- Ways to reduce the cost of living
What is the Consumer Price Index?
Consumer Price Index (CPI) measures the average price changes in a fixed basket of goods and services across various retailers that are commonly purchased by households over time.
Prices of 6,800 goods and services from 4,200 outlets are collected and used in the computation of the CPI. CPI also takes into consideration that price changes may be significantly different between products and retail outlets. Hence, the index is not indicative but instead reflects the average price movements across the selected goods and services.
CPI is also often used as a measure of consumer price inflation.
*The terms CPI and inflation are often used interchangeably as inflation is the percentage change in CPI over a certain period of time.
Types of Price Indicators
While CPI itself is a measure of price changes in the economy, it alone is not reflective of the overall economic situation. Hence, it is important to know some of the key price indicators that can be commonly found in a CPI report.
1. CPI All Item
As the name suggests, CPI All Item tracks expenditure across all divisions, groups and classes.
2. Core CPI
Core CPI is the aggregate prices paid by consumers for a fixed basket of goods and services excluding food and energy which have very volatile prices.
3. CPI Less Imputed Rentals on Owner-occupied Accommodation
The Owner-Occupied Accommodation (OOA) cost, a significant share of the Accommodation group, calculated in CPI comprises rentals that are imputed for owner-occupied homes.
This index is compiled as an additional indicator given that the imputed rentals on OOA have no impact on the cash expenditure of most households in Singapore as they already own their homes.
4. MAS Core Inflation
This is the core inflation measured by the Monetary Authority of Singapore. Due to their volatility, Accommodation and Private Road Transport are excluded from the calculation.
How to interpret CPI?
The latest CPI has 2019 as its base year. Rebasing exercise is conducted every five years to allow the data to be timely and updated to the latest consumption patterns of Singapore households. The base year is used as the basis of comparison to calculate the price movement between two periods of time.
For example, if the CPI for meat now is 105 points, this means that the price of meat has risen 5% since the base year. Meanwhile, if the CPI for coffee in 2015 was 92 points. This means that the price of coffee has risen 9% over the 4 years before the base year or 2% per year.
*Interesting facts: CPI for households is released on the 23rd of every month by the Department of Statistics Singapore. If it falls on a weekend or public holiday, the data will be released the following day.
Ways to reduce the cost of living
According to Statistics Singapore, the cumulative change in CPI All Items between January and May is 5% higher compared to the same period last year. As a consumer, you can feel the increase in prices of items across the board in recent months. While price changes are extrinsic and can’t be controlled, there are some methods to help minimise spending.
Be it reducing the cost of living or reaching your financial goals, there are only three factors that you can work on, namely:
- Increase your income
- Decrease your expense
- Grow your investments
In this article, we will be focusing mainly on how you can decrease your expenditure and ultimately reduce your cost of living.
Develop money-saving habits
Here at Planner Bee, we frequently share the latest financial tips and tricks to help you save money or grow your wealth. While financial literacy plays an important role in one’s finances, it is the unsustainable lifestyle that one adopts or the bad spending habits developed from young that result in a bad financial situation.
Breaking bad habits or starting a new one may seem like a paramount task, but we can all agree that it will not happen overnight. The key to financial success is awareness and persistence.
You can start by tracking your recent expenses and reviewing your spending. Ask yourself these questions:
- Are you guilty of making purchases on impulse?
- Are you shopping for status?
- Are you living within your means?
By monitoring and reviewing your expenses, you may find out that you are buying items you don’t need or paying for subscriptions you don’t use. Making slight readjustments to your spending allows you to have more control over your finances.
Tracking your expenses is just one of the many ways to develop good money-saving habits.
Read more: 5 Lifestyle Habits to Help You Save Money
With the abundance of mass media marketing, it is not uncommon to find yourself falling into the trap of consumerism, which is the urge or inclination to buy consumer goods.
Minimalism is the opposite of consumerism, which is only buying or keeping items that serve a purpose. Adopting a minimalist lifestyle forces you to be intentional with your spending. Spending on quality may increase short-term spending but allows you to cut costs on quantity over the long term.
A minimalist lifestyle emphasises simplification. Simplifying allows you to spend less, improving your overall cash overflow. A reduction in expenditure allows you to set aside more money for repaying your debts. The effects may not be felt immediately but reducing your debt is a crucial stepping stone towards reducing your cost of living and of course, financial freedom.
While general prices of goods and services may have increased over the past few months, it does not necessarily mean that you have to stop eating out, enjoying life or even stop spending altogether. It just means that you have to have a proper budget and follow it strictly.
Expenses tracking can be a seemingly tedious and redundant task. You are bound to question why you need to log the S$1.20 spent on coffee this morning. However, this would allow you to know exactly what and where you spent every dollar on.
Do check out the Planner Bee app here. There are 33 budget categories for you to choose from. Just set your monthly budget and your logged transactions will automatically be categorised and monitored.
Make sure to set a reasonable budget and constantly review it as you already know, prices tend to move over time. Not to mention, your consumption of goods and services is bound to change a few years down the road.
Changes in CPI have a different meaning for everyone. Individual experiences differ depending on the items consumed as well as one’s financial situation.
MAS foresee the CPI All Items inflation to average around 4.5% to 5.5% for the year as a whole. This is understandable given the current geopolitical situation, tight supply conditions as well as the pandemic situation. The current economic condition is forecasted to continue for the upcoming months before the inflationary pressure recedes.
Once again, this emphasises the need to save and invest. Having savings allows you to tide through periods like this while investing allows you to stay ahead of inflation. Hence, preventing you from making major compromises to your current standard of living.
Read more: 5 Reasons to Invest Right Now