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Inflation: Passive Expense and How Much Just To Keep Up?

Juan’s PHP1,000 in 2006 should be PHP1,395 in 2014 just to get by, keep up with inflation and retain the same purchasing power for the same level of expenses. With rising needs and standards of living (hence more expenses) and more mouths to feed, keeping up with inflation is not enough. A 40% return in 8 years is then, not enough. Now do your own math.

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If we’re after building our passive income and growing our net worth, then we should also be wary of a passive expense. A silent leak so to speak.

It’s a quarterly and annual figure we rarely pay attention to in daily life, whether those financially literate or more so those lacking in financial education. Admittedly I don’t give much thought to it as well, I just read updated figures, until it made me think deeper more recently.

A colleague was crunching some numbers to justify a proposal on an outsourcing rate hike, with inflation through the years as among the justifications. Was helping out my fiancee on her groceries and noticed that a can of sardines now costs PHP14 whereas when I was younger (and still doing the errands to sari sari stores, it only cost PHP7.) A canned corned beef used to be PHP40, now PHP54. A 1-pc chicken joy meal in Jollibee used to cost somewhere in the PHP50s while it’s share price (PSE: JFC) used to be PHP40s. Now the former is PHP90s while the latter is PHP210.

Inflation PH_zps3mb9uy2i.jpg

So it made me ask, was I able to keep up with inflation since I started my employed career? How much is the hurdle rate for Juan to keep up?

Investopedia defines inflation as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own (or PHP in our case) buys a smaller percentage of a good or service. 

Simply put, prices of goods increase over time, and as it does, the purchasing power of each peso goes down. Just to to keep up with the inevitable inflation, your income must increase in a rate that beats inflation. Otherwise, even if your income might have nominally increased, but since the increase is slower than inflation, you end up with a smaller purchasing power, and technically you lose money. Worse, you lose money passively.

If above image shows the inflation rate since 2006, below image shows how much it impacted the purchasing power of our beloved Peso, with 2006 pegged at PHP1.

Peso Purchasing Power_zpsk5jygzn4.jpg

As of end of last year, a peso in 2006 is now only worth PHP0.72. Which means Juan needs more pesos to buy an item which Juan could have bought at PHP1 in 2006. Or conversely, what Juan can buy at PHP1 in 2006, Juan can no longer afford with the same amount as of end 2014 since a peso’s actual power is now just PHP0.72.

Candies we can buy at 2 for PHP1 is now usually sold at 3 for PHP2. A cheap junk food might have stayed at PHP1 but if you notice its contents have significantly lessened.

And inflation is not just a simple increase over time. It compounds over time, very much like compounded interest. That is why, if we are up against an economic force that uses compounded interest, our investments much take advantage of compounded interest too.

Did some rough computations on how much our income and net worth must grow to barely keep up with inflation and I got the following:

how-1k-should-grow

Juan’s PHP1,000 in 2006 should be PHP1,395 in 2014 just to get by, keep up with inflation and retain the same purchasing power for the same level of expenses. With rising needs and standards of living (hence more expenses) and more mouths to feed, keeping up with inflation is not enough. A 40% return in 8 years is then, not enough. Now do your own math.

There’s always hope though. Invest. Now. Happy Easter!

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*Inflation and purchasing power figures from BSP website.

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About Geri (348 Articles)
Founder and main author. Husband, used-to-be-breadwinner, God-made multi-millionaire, employee, financial planner and adviser, investor, stocks trader, entrepreneur, agri-preneur, book author. Firm believer that all Pinoys deserve a richer life. Not a guru, but a forever student of the investments world, a work-in-progress.

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