In recent months, inflation in Singapore as elsewhere has been on a sharp rise — with prices of necessities such as food, energy and petrol continuing to climb due to external shocks and global inflationary pressures.
A vital factor came from the Covid-19 pandemic, including supply disruptions. Many companies have faced delays in their supply chains due to travel restrictions, raw materials shortages, and factory and port shutdowns. A plunge in supply then led to higher prices for many goods and services.
SMU Professor of Economics and Statistics (Practice) and Deputy Dean (Programmes) Chow Hwee Kwan's new book chapter entitled "Inflation Dynamics and Expectations in Singapore" therefore comes at a timely juncture. She delves into pressing inflation expectations and monetary policy issues in Singapore. Using inflation forecasts from the Monetary Authority of Singapore (MAS) Survey of Professional Forecasters as a measure of inflation expectations, she shows that short-term inflation expectations have recently shifted up. Moreover, forecasters are in greater disagreement regarding their current and next year's inflation predictions.
Then and now
While it seems that lifting restrictions and moving into an endemic phase is good news for the economy, the current inflation is partly the result of an unleashing of pent-up demand.
During the pandemic, consumers were essentially "nesting" — staying home to keep themselves and their families safe from the virus. This means less time spent in public places, more time cooking and cleaning at home, and hunkering down until the crisis passes.
When lockdowns were lifted and social distancing restrictions eased, pent-up demand for goods and services was released resulting in money flowing into the economy again. Unfortunately, protracted supply chain disruptions and the drawn-out war in Ukraine mean a shortage in major commodities and daily necessities. This sudden surge in demand and the relative scarcity of supply creates potentially inflationary conditions.
Prof Chow elaborates: "The normalisation phase from the onset of the Covid-19 pandemic crisis presents both a demand pull and supply push shock to domestic inflation while the Russia-Ukraine war has also set energy and food prices soaring."
Will this end soon?
It may appear that inflation could not get much worse for the average citizen, with decade-high food prices in the region and fuel pump prices at an all-time high in Singapore. However, Prof Chow cautions that "domestic consumer price pressures could intensify in the near term as reflected in the July 2022 upward revision of MAS' inflation forecast".
Due to the tight labour market and policies to increase wages of low-wage resident workers, the cost of labour in Singapore is also expected to rise. Once again, it's all about supply and demand. When labour cost goes up, businesses must raise prices to cover their costs. The higher prices filter down through the economy, leading to inflation.
That's not all. In the past, overall globalisation and China's integration into world trade meant countries had to compete to export goods, driving down prices as suppliers tried to undercut one another. This competition ultimately benefitted consumers by keeping prices low and increasing product choices.
"However, there appears to be evidence that some of these structural forces of disinflation may be fading," notes Prof Chow in her book chapter.
"For instance, the recent supply chain disruptions and consequent product shortages can shift from an efficient just-in-time to a less risky just-in-case manufacturing strategy which will increase production costs."
Recent moves by China, such as orders for domestic companies to halt selling fertiliser to other markets to preserve supplies at home, also reflect rising protectionist sentiments. Such measures have led to a rise in world fertiliser prices, a problem compounded by the disruption of Russian fertiliser exports during the war, affecting global commodity crop production.
The role of monetary tightening measures
Monetary tightening measures are needed during inflation. To combat price pressures, most central banks raise interest rates to make it less attractive for people to borrow money and invest in goods, hopefully slowing down the economy and stopping prices from rising any further.
However, due to its status as a small and open economy that imports almost every resource from overseas, Singapore's monetary policy is centred on the exchange rate, which has a greater influence on inflation than interest rates does. When the Singapore Dollar appreciates or becomes worth more relative to other currencies, its imports become cheaper — thereby absorbing inflationary forces driven by imported goods and materials.
The S$NEER (Singapore Dollar Nominal Effective Exchange Rate, the exchange rate between the Sing dollar and a basket of currencies of major trading partners) can float within an unspecified band, a price range within which a currency is allowed to trade. The country's central bank, MAS, typically sets the upper and lower limits of the band. The MAS may change the band's slope, width and mid-point level based on assessed risks to economic growth and inflation.
"The central bank, which takes pride in its record of maintaining a low and stable inflation in Singapore over the past decades, has promptly responded to rising price pressures by repeatedly tightening monetary policy to show its commitment to maintaining price stability," notes Prof Chow.
For instance, in the half-yearly review of the monetary policy in April 2022, the MAS tightened monetary policy not only by increasing the rate of appreciation of the S$NEER but also by re-centring the mid-point of the policy band upwards to the prevailing level. Since 2001, there has only been one other time that adjustments are made to both the slope and level of S$NEER. Moreover, MAS issued off-cycle announcements to tighten monetary policy in January 2022 and July 2022. Notably, it is unprecedented for two off-cycle adjustments in monetary policy settings to occur in such close succession.
"These forceful monetary policy responses reflect MAS' resolve to maintain price stability and are also targeted at maintaining well-anchored inflation expectations in Singapore. When inflation expectations are well anchored, they tend not to be affected by new information. This will stabilise domestic inflation despite external shocks," explains Prof Chow.
In addition, Prof Chow expects authorities to explore further diversification of import sources to curb inflationary pricing. For example, the Singapore Food Agency added Indonesia as a new source for the import of chicken following a ban by Malaysia on poultry exports. Investment in widespread technological advances can also help businesses manage challenges such as supply chain disruptions, or help improve the accuracy of economic data collection, providing policymakers with a clearer picture of areas experiencing inflationary pressures.
"To prevent any slippage in inflation expectations, the MAS has to remain watchful and nimble to prevent the momentum of price increases from becoming entrenched. Apart from arresting the rise in the cost of living, a non-inflationary environment would enhance Singapore's attractiveness as a location for financial transactions and long-term investment" says Prof Chow.
Last updated on 22 Feb 2023 .
