Real income, explained over a cup of chai

So here's what got me thinking. At the Forbes Global CEO Conference, Steve Forbes said Singapore isn't a cheap place to live. PM Lawrence Wong agreed with him.

Then he said something interesting. The government won't cap prices. The goal is for real incomes to keep rising, especially for lower-income Singaporeans.

Now, "real income" sounds like jargon. It isn't. Grab a cup of chai and I'll walk you through it.

Your payslip vs. your chai

First, two ideas. Keep them side by side in your head.

Here's the catch. Your payslip can go up while your real income goes down. Lemme use an example.

A worked example

I made up these numbers to keep the maths easy.

	Last year	This year	Change
Monthly salary	$5,000	$5,150	+3%
Cup of chai	$1.50	$1.60	+6.7%
Cups you can afford	3,333	3,218	-3.4%

See what happened? You got a raise, but prices rose faster. So you can buy less than before. Nominal income went up. Real income went down.

Try it yourself

Don't take my word for it. Move the sliders and watch what happens to your cups of chai. I set the defaults close to the example above.

Starting point: a $5,000 monthly salary and a $1.50 cup of chai.

Your pay rise3.0%

Prices went up by6.5%

Last year

3,333 cups

This year

3,223 cups

▼ Real income down: −3.3%

Prices grew faster than your pay. Despite the raise, you can buy 110 fewer cups.

So why not just cap prices?

Maybe you're wondering: why doesn't the government just freeze the price? If chai costs $1.50, make it illegal to charge more.

I thought the same thing at first. But think about the stall uncle. His costs keep moving. Milk, rent, gas and wages all go up. If he must hold the price at $1.50, one of three things happens:

• He loses money on every cup.
• He makes fewer cups.
• He closes the stall.

The price stays low, but now there's a queue, or no chai at all. That's a shortage. It's the "unintended consequence" the PM warned about.

What the plan is instead

So what do they do? Three things.

1. Make pay grow faster than prices. If wages outrun price rises, real income goes up.
2. Focus on lower-income workers. A price rise hurts more when it's a bigger slice of your pay.
3. Give targeted help. Utility rebates and cash support go to households that need it. That's better than making things cheaper for everyone.

The one-sip summary

Three things to remember:

• Nominal income is the number. Real income is what it buys.
• A raise smaller than price rises is a pay cut in disguise.
• Capping prices causes shortages. So the plan is to lift pay and help those who need it most.

Source: CNA's clip of PM Lawrence Wong at the Forbes Global CEO Conference (Instagram). Salary and chai prices are illustrative, not real data.