Kopi-O-Joe

By Dhruv Menon

So, what’s all the Bruhaha about?

 

Inflation is a word that’s thrown around a lot these days and seems to be the one stop solution to all things price related (yes, I know that there are other -flations, but this is the most common one). I remember having a conversation with my friend in India about the steep price increase of ONIONS (if you can believe that).

It went somewhere along the lines of, “Bro, what’s with these onions man? Why are they suddenly so expensive?” “Inflation bro, Inflation” and when I asked my seemingly all- knowing friend about what inflation is (I honestly didn’t know, it actually, reminded me of balloons because you had to inflate and deflate them) his reply was simple, “Demand-Supply bro, Demand-Supply.” He wasn’t entirely wrong but hey, we can’t really write “Demand-Supply” in our exams for every single answer right (although, it is true).

I’d like to point out that its moments like these that sparked my keen and devotional (also annoying to other people) interest in Economics in the first place.  Coming back to the point, what is Inflation?

 

Figure 1: Always Label Your Diagrams

 

The Boring Part

 

(In robotic voice) Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. [1] *finally falls asleep in 8:30 lecture* All the big words aside, we can split the definition of inflation into two different parts: “the general level of prices” and “purchasing power of currency”.

The general price level is derived from a bundle of goods, let’s say Ice Cream (Hello!  Ice Cream is a necessity of EVERY bundle), Ramen (Yummm), and Kale Chips (we have to be healthy guys, come on). The prices of these goods are, then observed in the base year (a year where the economic growth of the country was more smooth sailing than a tumultuous up and down) and then compared to the prices of these yummilicious AND HEALTHY goods in the current year.

Based on this and the “Demand-Supply” of these goods, a wise man once said, “Inflation, when mild, is good for the economy.” Now here comes the complicated part and my advice to you is to read the sentence twice, Higher DEMAND=Higher PRICES+ higher SUPPLY= more MONEY (from extra goods sold) which goes to the workers= higher DEMAND (because the workers also need to eat right), “… And so, we are all connected in the great Circle of Life.”  Therefore, Inflation is the rate at which the price of your ice cream, ramen and kale chips increase every year due to increased demand (Told you that it’s all Demand-Supply).

 

Figure 2: Did you know that Zimbabwe’s Inflation Rate was 231, 000,000% in 2009?[1]

 

“The Data Never Lies”

 

Now that you’ve got inflation under your belt, between 2-4% (Please tell me that this was a good joke), what’s this erosion of the purchasing power of currency? Let’s use an example to look at this, so you’ll have to bear with me. Everybody likes Kopi right (all coffee aficionados say WOOO) so, we’ll look at Kopi consumption:

A kopi-O in Kopitiam costs SGD 2.00 SGD and for all you Starbucks peeps, I’ve got y’all covered. A tall cup-o-joe (Coffee of the Day) costs SGD 3.70. Okay, so let’s say that you really love your Kopi/Coffee and you decide to save one Kopi/Coffee’s worth of money (SGD 2.00 and SGD 3.70 respectively). The average saving rate for 10 years is estimated to be 0.1% while the Inflation Rate is estimated to be 3.12%[2]. Here’s what the data says:

 

Table 1: Kopi O Consumption Over the Years                                                                       

Year Savings Kopi O
2018 SGD 2.00 SGD 2.00
2019 SGD 2.00 SGD 2.06
2020 SGD 2.00 SGD 2.13
2021 SGD 2.01 SGD 2.19
2022 SGD 2.01 SGD 2.26
2023 SGD 2.01 SGD 2.33
2024 SGD 2.01 SGD 2.40
2025 SGD 2.01 SGD 2.48
2026 SGD 2.02 SGD 2.56
2027 SGD 2.02 SGD 2.64

Table 2: COD Consumption Over the Years

Year Savings Tall Coffee
2018 SGD 3.70 SGD 3.70
2019 SGD 3.70 SGD 3.82
2020 SGD 3.71 SGD 3.93
2021 SGD 3.71 SGD 4.06
2022 SGD 3.71 SGD 4.18
2023 SGD 3.72 SGD 4.31
2024 SGD 3.72 SGD 4.45
2025 SGD 3.73 SGD 4.59
2026 SGD 3.73 SGD 4.73
2027 SGD 3.73 SGD 4.88

 

Confused? Just so you know, this took me a LONG time to make mostly because even I had no idea about what I was doing but just like I did, let’s take it one step at a time? Keeping the saving rate and inflation rate constant over 10 years, we get the results displayed in the table above. “Ya ya, so what’s the point of all this?” Apart from my amazing excel formulae skills, the point is that, the values of the savings when compared to the prices of the Kopi/Coffee are different from each other.

*slow claps at the obvious* Since I don’t want to keep typing Coffee/Kopi, we’ll only look at the example of Kopi: your average Kopi O will cost SGD2.64 in 2027, which is SGD 0.64 more than what it costed in 2018 thus leading to… you got it! The erosion of the purchasing power of currency where the same SGD 2.00 now buys you a lesser amount of the same good (will 0.76 Kopi O’s suffice?)

Here’s a fun exercise, why don’t you try dividing the price of a tall coffee in 2018 by its price in 2027 and see what you get *subtly encourages math, hehe*. “But what about my savings? I can use that to buy my Kopi right?” Ehhhhhh, not so much, since the saving rate (0.1%) is less than the inflation rate (3.12%) you’re actually, making negative gains (to the rate of 3.02%) on your investment. “Sure, I think I can handle the small loss I’m making though, thanks for the help!” Just a minute Sherlock, try multiplying the (SGD 2.64 – SGD 2.02) difference by 100 because let’s face it you drink a lot of kopi (let’s not get started about the number of stars you Starbucks peeps have in your account). Not such a small difference anymore, right?

 

Ta-Da! The End

 

*Puts on monocle and suit* In conclusion, the author would like to state the following: through the “research” (Hey! Work on Excel counts as research okay) and experimentation conducted in this article, the author urges you to RELAX, take a deep breath. Economics is actually, a lot of fun when you come to think of it.

Another wise man (me) once said, “It’s all about the diagrams.” It is though, try to remember the formula for the variable in question and its associated diagram and life will become a lot easier. The more you link it to real life, the better, because that’s what its all about (dooooo the boogie woogie).

Also, Inflation is just a hoity toity term to express the relative increase in the price of a commodity. Don’t forget that some amount of Inflation is healthy for an economy as it encourages economic growth, but too much of it and you’re setting yourself up for a brand new financial crisis.

 

Figure 3: Yay! You read an Econs article without getting bored (hopefully)!

 

Reference:

1. Investopedia: Terms: Inflation. (Online) https://www.investopedia.com/terms/i/inflation.asp Accessed on 23 July 2018

  1. BBC: Hi: Africa. (Online)

http://news.bbc.co.uk/2/hi/africa/7660569.stm Accessed on 25 July 2018

  1. Dollars and Sense: An Easy Example of How Inflation Works. (Online) https://dollarsandsense.sg/an-easy-example-of-how-inflation-works/ Accessed on 23 July 2018