Last month, consumer price index (CPI) increased by a 0.7 per cent margin as compared with February last year.
According to The Straits Times, last month, consumer price index (CPI) increased by a 0.7 per cent margin as compared with February last year. This marks the third straight month of positive inflation in Singapore, succeeding a record two-year spell of negative inflation (also known as deflation) from November 2014 to October last year before it flatlined in November at zero per cent.
To make sense of the data that has just been presented to us laymen and understand how such an increase will impact our daily lives, we will first have to understand what the index stands for.
Consumer price index defined
The Department of Statistics Singapore defines the CPI as a design “to measure the average price changes in a fixed basket of consumption goods and services commonly purchased by the households over time.” These goods and services constitute:
It is also a common measure of inflation.
What caused the long spell of negative inflation back in 2014?
According to CIMB Private Banking economist Song Seng Wun, negative deflation back in 2014 was in part due to the fall in the price of crude oil, which is an input to nearly all economic activities.
However, due to the government’s introduction of cooling measures to the housing and motor vehicle markets, costs of accommodation and private transports costs—which account for one-third of headline inflation in total—were on the decline and that made them the biggest contributors.
So, what’s causing the consumer price index to pick up?
Mr Song noted that an increase in commodity and metal prices, which are inputs for production, eventually worked into the final cost of goods and services, contributing to the positive inflation. In addition, expectations of stronger demand this year also helped to drive prices up.
In a joint statement by the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry, Singaporeans can expect inflation to continue to grow due to recovering global oil prices, the imposition of carbon tax that will translate to higher electricity costs, and the impending hikes in water prices to name a few.
Why is higher inflation welcomed when it translates to a higher cost of living?
Deflation, especially over a prolonged period, is a huge economic problem.
As there are expectations for prices to further fall in the future, consumers tend to spend less in the current time period, which will lead to a decline in demand. According to the supply and demand model, when demand falls, profit levels will follow suit. And, when you spend less, companies will produce less too. This fall in production will encourage companies to cut costs, resulting in unemployment.
Then, as unemployment rises, demand is further reduced, driving prices down even more.
This vicious cycle is also known as the deflationary spiral, an economic pitfall whereby a period of decreasing prices leads to a situation where the economy cannot recover—leading us right back to the point on why we need inflation.
When the money you possess now is worth more than it will be in the future (when prices rise), you are likely to spend more money or invest more for higher returns—the same applies to businesses. Investments help to stimulate the economy and keep it afloat.
How will this impact us?
The consumer price index may have declined in the past two years, but this fall is not directly reflected in our everyday expenses. Economists explain that this discrepancy exists because of the weightage of the goods and services in the market basket.
As mentioned above, lower costs of accommodation and private transport costs are the biggest contributors to deflation—among them are lower COE prices and rental rates. Because we don’t buy a COE every other day and more than 80 per cent of the population own an HDB flat, the impact appears to be less significant.
However, now that inflation is on the rise again, that doesn’t necessarily mean we will feel an immediate burn on our pockets. Various factors such as global prices will still have to be taken into consideration.
Nevertheless, even as the global outlook remains drab, we can expect stronger economic growth at home and remain hopeful about a pickup in the local job market. Fingers crossed!
