25 February 2011

Slower Inflation Does Not Mean Lower Prices

Headline CPI (or Consumer Price Index) inflation averaged 2.8 per cent for 2010.  Rising inflation in Q4 2010 was driven by higher costs of private road transport and accommodation.

These two factors, along with higher food prices around the Chinese New Year period, would push up headline inflation to 5 to 6 per cent in the first few months of 2011, said Monetary Authority of Singapore ("MAS") on 17 February 2011.  Thereafter, headline inflation was expected to moderate, especially in H2 2011, as the base effects dissipated.

MAS projected CPI inflation in 2011 to average between 3 and 4 per cent, driven by four factors, each accounting for roughly about a quarter of the headline number —

a.  The recent surge in COE premiums would result in private road transport contributing significantly to headline inflation in the early part of 2011.  However, lower demand for cars would cap further sharp rises in car prices.

b.  Residential property rentals had risen sharply since Q3 2010 and would continue to have an mpact on headline inflation in H1 2011.  The tighter housing market situation, however, should ease in H2 2011 as more supply came onstream.

c.  The recent spike in prices of some food commodities was likely to feed into domestic food prices in the short term.  Barring further supply shocks, global oil prices were likely to rise moderately in line with the gradual global economic recovery, from about US$90 per barrel to around US$100 towards the end of 2011.

d.  Services inflation would have a larger impact on CPI inflation than in 2010 due to the strong wage pressures amidst the tight labour market.

Minister for Finance Tharman Shanmugaratnam had told Parliament on 10 January 2011 that about half of the headline CPI inflation rate in 2010 was due to the sharp rise in premiums for Certificates of Entitlement ("COE").  However, that did not mean a similar increase in actual cash outlays by the majority of Singaporeans, as only 3 to 4 per cent of households, or 7 per cent of all car owners, purchased new COEs in 2010.  The majority of car owners held existing COEs.  If COE premiums stayed high, however, everyone who purchased a new car or renewed a COE in the future would face higher prices eventually.  However, such purchases would take place over a period of years, and the impact on cash outlays for households as a whole would be spread out over a few years.

Anyone who did not buy a car or renew a COE would have escaped approximately half the headline CPI in 2010.  Anyone who bought a car or renewed a COE in 2010 probably would have suffered more than what was indicated by the headline CPI.  Firstly, CPI is a composite basket of goods and services supposedly representative of the consumption patterns of the population at large, in which some individuals or households consume a particular good or service but others do not.  The fewer the percentage of individuals or households that consume a particular good or service, the larger the impact on them.  Secondly, CPI is a year-on-year figure, but few people buy a car or renew a COE every year.

Finally, it is important to note that even if CPI inflation eases in 2011, it is due to the dissipation of base effects.

Easing of CPI inflation simply means that prices (of goods and services constituting the CPI) are not rising as fast as they have been rising.  This does not mean that prices have reverted to previous levels.  And unless they do, consumers will pay more than they used to pay previously.

Consumers may be relieved if CPI inflation falls to 1 per cent in 2011, for example, but they will still pay more in general for what they consume in 2011 than they did in 2010.

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Notes

1.  Presentation by Monetary Authority of Singapore in conjunction with the release of "Economic Survey of Singapore 2010" on 17 February 2011.

2.  "Inflation and Declining Interest Rates: Impact on Singapore Households", Singapore Parliament Report, 10 January 2011.

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