WHAT’S UP WITH INFLATION?

Irvin Seah, senior economist at DBS Bank, tells us more about the rising cost of living in Singapore:

What are the main causes of Singapore’s headline and core inflation respectively?

A confluence of factors, such as the strong recovery from the Covid-19 crisis resulting in a surge in global demand, and the Ukraine war, has prompted sharp spikes in global energy, commodity and food prices. These in turn are being passed through into the Singapore economy. Domestic inflationary pressure is also rising on the back of strong pentup demand and higher business costs, hence exacerbating upward pressure on both headline and core inflation.

How much will global inflation affect the cost of living in Singapore?

Global inflation certainly has a huge impact on the cost of living in Singapore. About 60-70 per cent of local consumption and inputs for production in Singapore are in fact imported. Such imports would include perishable food items, cars, fuel, consumer goods, intermediate inputs for production in manufacturing plants, and so on. While a strong SGD would help to offset the rising cost of imports, the Monetary Authority of Singapore (MAS) will also have to balance this against the adverse effect of a strong currency on export performance – a stronger SGD will make Singapore’s exports less competitive.

How much is the cost of consumer goods projected to rise here in the next six months or so?

On an aggregated basis, we expect headline CPI inflation to average at about 7 per cent from September 2022 to February 2023. Although inflation is expected to ease in the coming months, the headline number is still about 3.5 times higher than the historical average of about 2 per cent, and price level is still significantly higher compared to the same period last year. Plus, GST will be raised by 1 percentage point in 2023, which will add to the existing inflationary pressure.

Will there be a reprieve any time soon?

Higher than usual inflation is here to stay, at least for the next one to two years, unless a recession kicks in – but that is another risk factor that policymakers are trying to avert. The ideal outcome would be for inflation to gradually ease towards a normalised trend path in the coming three to five years.