Inflation has been a growing concern for many over recent months. The rising prices of goods across many sectors will no doubt incite waves of anxieties and worries in every individual. While inflation does not discriminate, it disproportionately affects every stratum in society. Not everyone copes similarly to adapt to their rising expenses. This article aims to provide an overview of the realities of the middle-class facing inflation and how they would fare in surviving an inflationary crisis. It also seeks to understand how far inflation has affected them and whether the government should do more to help them through these challenging times.
After the pandemic eased off, the global economy started to show signs of recovery. The tourism industry gradually recovered, and businesses are inching back to what was considered the norm before COVID-19. However, the positive outlook did not remain. The economic climate is once again hit in an unprecedented way. The war in Ukraine that shook the world for much of 2022 caused waves of uncertainties and disruptions, delaying supply chains globally, causing stock markets to be volatile, and causing oil prices to skyrocket within the past months1. As global forces come into play, the rest of us face an impending and incessant outcome: inflation.
SURGE OF INFLATION IN 2022
As the inflation rate surges globally, governments around the world scramble to curtail and mitigate the mounting price pressures. Recently, the Monetary Authority of Singapore (MAS) announced another round of monetary policy tightening – an off-cycle move that seems to surprise many. This is largely a response move from the revision of its core inflation projection, which currently stands at 3.0% to 4.0% (previously 2.5% to 3.0%). As the world faces global supply chain disruptions and geopolitical uncertainties, the prices of certain goods and products spiked over recent months. As of July 2022, the headline inflation stands at 6.7%, the highest it has ever been in 12 years2. The government has made positive projections for easing prices towards the end of 2022. However, global forecasts seem to suggest otherwise and that the headline inflation is due to an increase exceeding 7.0% in the coming months. In anticipation of this prediction, MAS has announced that there will be another monetary policy update this October to address this, perhaps another further tightening measure3.
INFLATION: THE CRUELLEST TAX OF ALL
The phrase “the cruellest tax of all” was coined by Milton Friedman when he was referring to the layman’s despair towards inflation4. Inflation is a force that does not discriminate, regardless of income and demography. Every single productive citizen is subject to the same economic forces influenced by factors beyond the control of any individual. In the face of inflationary forces, the only role one can play as an individual in any economy is to adapt and acclimatise. And perhaps the term ‘tax’ was used aptly as the idea of taxation is generally perceived as a cost that disproportionately affects the middle to lower income more as compared to the rich. In a similar fashion to how the rich can avoid tax, they can also prevent inflation by hedging against it using gold and silver – a luxury not all can afford.
Professor Yossi Mekelberg, an associate fellow of the Middle East and North Africa (MENA) programme at Chatham House, further expounded on this idea elaborating how these forces of inflation are inevitably increasing inequality within society. The poor, as it is, is extremely sensitive to even the slightest price change, and a mere $50 to $100 increase further strains their already stretched monthly expenses. He argues that these inflationary forces are discriminately forcing the poor further into the poverty trap while dragging the middle class below the poverty line. In response to this epidemic, governments usually inject stimulus packages into the economy by supporting the middle and lower income in order to soften the blow of the inflationary pressures. However, these efforts seem to be temporary and unsustainable in improving the state of the poor and middle income in the long run5.
THE MIDDLE CLASS: A VAGUE DEMOGRAPHY
One may argue that middle-income families are those earning an income within the median salary range, at $4,680 as of 20216. However, it is also arguable that the middle income represents the most fluid and largest demography compared to the lower income and the rich. While the rich and the poor are easily categorised within society based on their income levels, the middle income represents people who do not fit into these categories easily. In Singapore, it is more accurate to determine the middle income based on their behaviour and spending patterns. Typically, families within the middle-income demography would spend a large portion of their monthly budget on necessities such as housing, food, and education, yet still, have an excess sum that can be utilised for leisure and entertainment7. It is also worth noting that middle-income families tend to exhibit shared characteristics with lower- and high-income groups. This is also why it is increasingly challenging to treat middle-income families as a demographic on its own and instead add subcategories to classify them further. In many cases, economists would spread them into two broad categories: the higher middle income and the lower middle income.
THE MIDDLE-INCOME SQUEEZE
As the cost of goods rises today, middle-income families find it increasingly difficult to maintain the same level of lifestyle that they could have otherwise afforded in the past. While Singaporeans may find that their salary increased in 2022 (the average salary increase is 3.9% in 2022), this increment seems to have been a setback with the rising inflation rate8. At the same time, parts of the world that do not experience the same average salary growth find it difficult to keep up with the hiking prices of goods and necessities.
Inflation, as of late, seems to impact middle-income families more disproportionately than other substrates in society. This is primarily due to the fact that the prices affected over the recent months include food and petrol, which contribute to a significant portion of the typical middle-income monthly budget. In order to cope and adapt, the lifestyles of the middle class typically have to shift more adversely than the rest over recent months. In her paper Inflation and Poverty, Eliana Cardoso wrote about the inflation tax that seems to impact the middle class more adversely than the poor. She argued that those who are already poor face significantly less increment in the face of inflation than those within the middle class. She proved that the inflation tax is regressive in many instances and almost always ends up killing the savings of the middle class9.
CUTTING DOWN ON DISCRETIONARY SPENDING
The first and most immediate response to news of inflation and rising costs of living is to cut down on discretionary spending to free up disposable income. In most cases, families from middle to lower income behave similarly to lower their monthly expenditure – cutting what they can afford10. This can range from choosing cheaper alternatives or buying house brands compared to more renowned international brands. However, a more significant observation is how the middle class adjusts their lifestyle habits. This includes typical leisure considered a norm for the middle class, such as eating out and spending on family entertainment. Reports suggest that middle-class families no longer spend time dining outside and bonding over movies. Instead, they opt to cook at home and spend their family time at free and cost-effective places such as public beaches11.
A more long-term coping mechanism within the middle class includes making decisions over a larger and more significant part of their lives. Some may refinance their home loan to find a cheaper monthly mortgage payment. Others would even reconsider more significant changes, such as sending their child to a government school compared to a private school.
THE UNASSUMING VICTIM: FRESH JOB SEEKERS
In the midst of an inflation spike, one unassuming demography that is particularly struggling is the newly graduated. These fresh job seekers are people who have just come out of the pandemic in hopes of employment yet are faced with the current inflationary climate. Inflation results from a supply mismatch in the global supply chain, and as demand increases, the jobs available are bound to increase too. However, the wages these jobs offer are not keeping pace with the prevailing inflation rate globally. This means that freshly employed graduates are functioning on a salary range that puts them at a relative disadvantage with a reduced purchasing power.
However, the economy is facing a tight labour market, which is a relief for any fresh graduate about to embark on employment. This means that even though wage is not increasing in tandem with inflation, the possibility of retrenchment is improbable except for a select few sectors. Amidst the global supply chain disruption, any potential delay within inventory-intensive sectors is detrimental to the operational costs of the business. In an effort to cope with the rising expenditure, companies may lay off workers in response to the current economic climate. Thus, the labour market has indeed seen a slight increase in retrenchment within the manufacturing and construction industry compared to others12.
THE SINGAPOREAN STIMULUS
In the wake of the rising inflation, the Singapore government has recently announced a $1.5 billion aid that aims to target a specific portion of the society to help them get by these coming few months. Among the packages is a cash disbursement of $300 to every household and a $100 utilities credit to bolster the effects of the rising food and utility expenses. The government is also rolling out a Progressive Wage Credit Scheme (PWCS) to incentivise businesses to spur wage growth and extend the current Job Growth Incentive that benefits businesses when they hire mature job seekers, ex-offenders, or people with disabilities13.
The stimulus package that the government has rolled out is comprehensive and targets the vulnerable portions of society that are most in need amid the current inflation. However, these injections can only amount to so much and will not be sustainable should the inflationary pressures persist. Furthermore, these targeted aid packages are designed to help those the Singapore government perceives as being hit the worst by the persisting inflation. To the vast majority who are seemingly affluent yet no less affected by the rising costs of certain goods and necessities, they are left to adapt and fend for themselves. While the poor and vulnerable can rely on government packages, the middle class survives on their own savings.
The current inflationary climate is still expected to persist as long as the Ukraine war continues. As the prices of goods and necessities continue to rise with the global demand-supply mismatch, governments worldwide are responding to this phenomenon through monetary policy tightening and economic stimulus packages. Singapore’s stimulus comes in the form of a $1.5 billion aid package that strategically helps the most affected to soften the blow of the inflation and help them stay afloat in the coming months. However, this article suggests that the cash reliefs and credit schemes will not amount to much should the inflationary spike worsen. The poor and the vulnerable can only be assisted to a limited extent. Much to the dismay of the middle class, additional aid for a seemingly affluent majority is not within the purview of any government, even Singapore. And even if they are affected substantially, they are expected to fend for themselves through this inflation. The question remains on which will last longer, the inflationary spike or the savings of the middle class? ⬛
1 JPMorgan Chase & Co. The Russia-Ukraine Crisis: What Does It Mean For Markets? 2022, March 22. (Updated) Retrieved from: https://www.jpmorgan.com/insights/research/russia-ukraine-crisis-market-impact
2 Lin, C. Tightening risks loom as Singapore’s July core inflation hits a 13-year high. Reuters. 2022, August 23. Retrieved from: https://www.reuters.com/markets/rates-bonds/singapore-july-core-inflation-rises-48-beating-forecasts-2022-08-23/
3 CNBC. Singapore steps up inflation fight with surprise central bank tightening. 2022, July 13. Retrieved from: https://www.cnbc.com/2022/07/14/singapore-central-bank-tightens-monetary-policy-in-off-cycle-move.html
4 Easterly, W., and Fischer, S. Inflation and the Poor. Journal of Money, Credit and Banking, 33(2), p. 160. May 2001. Available at: https://doi.org/10.2307/2673879
5 Mekelberg, Y. Why inflation is the cruelest tax of all. Arab News PK. 2022, February 5. Retrieved from: https://www.arabnews.pk/node/2018821
6 Lim, A. Average Median Income/Salary in Singapore by Age, Etc . SmartWealth Singapore. 2022, February 14. Retrieved from: https://smartwealth.sg/average-income-salary-singapore/
7 OECD. Under Pressure: The Squeezed Middle Class. 2019, May 1. Available at: https://doi.org/10.1787/689afed1-en
8 Nanyang Technological University of Singapore. Robust pay rises in Singapore last year tempered by inflation. 2022, May 31. Retrieved from: https://www.ntu.edu.sg/business/news-events/news/story-detail/robust-pay-rises-in-singapore-last-year-tempered-by-inflation
9 Cardoso, E. Inflation and Poverty. NBER Macroeconomics Annual. March 1992. Available at: https://doi.org/10.3386/w4006
10 Converse, M., Curtin, R. T., and Kallick, M. Coping with Inflation. Institute for Social Research, University of Michigan. 1980. Retrieved from: https://isr.umich.edu/wp-content/uploads/historicPublications/Copingwithinflation_4332_.PDF
11 Abu Baker, J. Coping with inflation: How one family of five changed their lifestyle to save money. CNA. 2022, July 24. Retrieved from: https://www.channelnewsasia.com/singapore/inflation-rising-prices-car-petrol-transport-cost-family-2806636
12 Tay, H. Y. Retrenchments hit 24-year record low in Q1 amid tight labour market: MOM. The Straits Times. 2022, April 28. Retrieved from: https://www.straitstimes.com/singapore/jobs/retrenchments-hit-24-year-record-low-in-q1-of-this-year-mom
13 Ministry of Finance. Press Release: $1.5 billion Support Package to Provide Targeted Relief for Lower-Income Households and Vulnerable Groups. 2022, June 21. Retrieved from: https://www.mof.gov.sg/news-publications/press-releases/1.5-billion-support-package-to-provide-targeted-relief-for-lower-income-households-and-vulnerable-groups
Huzhaifah Kamal is a graduating student from the University of Jordan. He is pursuing a Bachelor’s of Arts in Islamic Jurisprudence and its fundamentals and has recently completed a Bachelor’s of Science in Accounting and Finance from the University of London. His area of interest involves Islamic contemporary issues, Islamic Economics and Islamic Finance.