Why Higher Inflation Is Good For Singaporeans

Latest CPI numbers in Asia Pacific

Australia              2.7%  (2.2% last year, 3% 2 years ago)
Bangladesh          7.4% (7.1% last year, 10.6% 2 years ago)
Cambodia            4.2% (1.2% last year, 5.3% 2 years ago)
China                    2.5% (2.5% last year, 4.1% 2 years ago)
Hong Kong          4.3% (3.7% last year, 5.7% 2 years ago)
India*                   9.9% (10.6% last year)
Indonesia             8.4% (4.3% last year, 3.8% 2 years ago)
Kazakhstan          4.8% (6.0% last year, 7.4% 2 years ago)
Kyrgyzstan           0.0% (0.1% last year, -2.1% 2 years ago)
Macau                   5.7% (5.8% last year, 6.8% 2 years ago)
Maldives               3.7% (5.9% last year, 16.8% 2 years ago)
Malaysia               3.2% (1.2% last year, 3% 2 years ago)
Nepal                    10.3% (10.4% last year, 7.5% 2 years ago)
New Zealand       1.6% (0.9% last year, 1.8% 2 years ago)
Philippines          4.1% (3% last year, 4.2% 2 years ago)
Singapore             1.5% (4.3% last year, 5.5% 2 years ago)
S. Korea                1.1% (1.4% last year, 4.2% 2 years ago)
Sri Lanka              4.7% (9.2% last year, 4.9% 2 years ago)
Taiwan                  0.3% (1.6% last year, 2% 2 years ago)
Thailand               1.7% (3.6% last year, 3.5% 2 years ago)
Vietnam                5.5% (7.1% last year, 17.3% 2 years ago)

Jan. 23 (Business Times) — Headline inflation averaged 2.4 per cent for the whole of 2013, “sharply lower” than the 4.6 percent in 2012, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said in a joint statement on Thursday.

Clothes and cars are cheaper but food is not.

We are seeing signs like this.


And this.


Sometimes we imagine that food would be cheaper in a market instead of Cold Storage but that I found not to be true, in the case of water melons last week. Market vendor with only 1 watermelon for sale quoted me 2 bucks a kg thinking I would only want a quarter. Weighing the thing, it was well over 10 bucks for a watermelon. Lucky for me, I found a bigger one in Cold Storage that afternoon for $5.95.

My friend, Retired Trader, asked a food stall if their price hike came with better food. He was promptly informed that MRT fare hikes are in store along with train breakdowns and disruptions, at least food consistency will be assured with their price hike.

I got to thinking about the CPI and what is it really ? It is a measure of consumer inflation and each country has its own method of computation which begets a number that is not universally comparable and yet relevant to each country in terms of their consumer baskets.

For instance, Hong Kong’s CPI basket is based off 3 categories of households : low (60%), medium (30%) and high (10%) expenditures. I am not sure if it refers to the poor, middle class and rich because some rich people do not spend. Singapore’s is far more equitable with the following components.

Health Care
Recreation, others
All less accomodation

Do we really care about the CPI ? (I wrote this last year – https://tradehaven.net/market/do-we-really-care-about-inflation-mad-march-hare-edition/)

Do you know what I think ?

Singaporeans (and Malaysians and Thais, too for that matter) are a pretty highly geared lot. Thus, the interest rate on their debt is heavier burden on their expenditures.

Interest rates are not directly imputed into the CPI though some may argue theoretically that it should be somehow correlated to rentals.

The CPI is used by most central banks around the world to manage monetary policy and set benchmark interest rates. When CPI falls, there is a case for cutting interest rates and vice versa. Imagine the double whammy Malaysians face when their CPI is soaring ? They get a rate hike which increases their debt burden (for most loans are pegged to short term KLIBOR).

Yet Singapore does not have a monetary policy which technically means it is not possible to influence interest rates directly. Instead CPI is to manage the foreign exchange policy and set the strength of the SGD trading band versus a basket of other currencies. The implication that a strong SGD will help rein in imported inflation.

[Although prices have demonstrated that a stronger SGD does not mean imports get cheaper because the importers (hmmm) do not have to pass their cost savings to Singaporeans (price inelasticity) and higher wages usually mean people are willing to pay more. If they weaken the SGD (once in a blue moon), prices do not come off in tandem as well. Let us leave this notion out of the subject and assume a perfect market scenario.]

In the meanwhile, interest rates typically edge lower when the SGD strengthens (higher CPI) as inflows and demand for the SGD dollar drives deposit rates down (or lowers borrowing costs) and when the SGD weakens (lower CPI), outflows will raise the cost of borrowing the SGD dollar.

To put into perspective.

Malaysia – higher CPI (inflation) = higher interest rates from rate hikes
Singapore – higher CPI (inflation) = lower interest rates from strong SGD dollar and inflows

No double whammy for Singapore because lower inflation and cost of living will buffer the increased debt servicing burden as interest rates go up ?

And how did I manage to put myself in a position cheering for $10 watermelons ?