MTI, MAS clear the air on CPI, inflation and interest rates

WE REFER to last Friday's letters by Ms Wendy Yuen ('The joint reply has left me more confused'), Mr Christopher Teng ('Inflation: Offer more relevant figures') and Mr Yeo Chee Kean ('Using interest rates to cool domestic demand may be a better solution').

Ms Yuen suggested that housing prices should be used to measure the cost of consuming owner-occupied housing. We understand the intuition behind this suggestion. However, the Consumer Price Index (CPI) covers only consumption expenditures. A house is both a consumption good and an investment good. As house values could appreciate or depreciate, its inclusion will introduce capital gains or losses into the CPI. To reflect only the consumption element of owner occupancy, the actual market rental is a more suitable proxy.

Mr Teng suggested highlighting inflation figures that directly measure the cost experience of the majority of Singaporeans. This is indeed important. The CPI is based on a detailed survey of households' consumption patterns. The weights in the CPI reflect the consumption behaviour of a representative household.

However, an individual household's consumption pattern could differ from the representative household. The sub-components of CPI thus provide more details that might relate to the experiences of particular households. For instance, year-on-year food price inflation came in at 2.7 per cent in March this year. A consumption basket comprising food, fuel and utilities, and public transport, as suggested by Mr Teng, will show an inflation rate of 4 per cent, while the overall CPI inflation rate was 5.2 per cent.

Mr Yeo is right that COE prices cannot be ignored because of the spillover effects on consumer prices. Indeed, the CPI captures the effects of higher COE premiums transmitting to the prices of other goods and services, including public road transport.

Mr Yeo also suggested that interest rates be used to control inflation. The exchange rate has a significant impact on the prices because the majority of products Singaporeans consume come from abroad.

An exchange rate appreciation is thus an effective way to control inflation, but this has to be balanced against the adverse consequences on businesses.

Interest rates play a larger role in determining asset prices compared to consumer prices. As we cannot control both the exchange rate and the interest rate given free capital flows, the Government relies on measures such as the loan-to-value ratio and stamp duties to manage asset price inflation.

We will continue to place priority on addressing price pressures in the economy.

Cindy Keng (Mrs)
Director
Corporate Communications Division
Ministry of Trade and Industry (MTI)

Angelina Fernandez (Ms)
Director
Corporate Communications Office
Monetary Authority of Singapore (MAS)
ST Forum, 9 May 2012

'The joint reply has left me more confused.'

MS WENDY YUEN: 'The joint reply by the Ministry of Trade and Industry and the Monetary Authority of Singapore ('What Govt is doing to tame domestic inflation'; last Saturday) has left me even more confused.

If most Singaporeans own their homes instead of renting, why should rentals then be a component of inflation? Shouldn't the formula be tweaked to adjust for property market movements instead? This would then make the inflation index a more realistic marker that most Singaporeans can rely on. Or perhaps given the huge upswing in the property market, capturing it in the inflation index would paint a scarier picture? If so, the property market is indeed a malady that needs fixing.

Also, I cannot discern the clear link between the cooling measures in the residential property market and how they help in reducing other domestic costs. The joint reply appears to argue that moderated external demand for our goods and services because of a strong Singapore dollar is good. But whenever export data gives a weak showing, alarm bells start ringing and the mood becomes sombre and is also reflected in the stock market.

The reply has left me none the wiser and I await the Government's assurance that the problem of an increasing cost of living for the average Singaporean is being tackled.'

ST Forum, 4 May 2012

Inflation: Offer more relevant figures

SINCE the headline consumer price index (CPI) inflation has significance mainly for non-home owners and new car buyers, the Ministry of Trade and Industry (MTI) and the Monetary Authority of Singapore (MAS) could consider having and highlighting a set of inflation figures that directly impacts the majority of the population ('What Govt is doing to tame domestic inflation', joint reply by MTI and MAS; last Saturday).

Such a figure could incorporate a large percentage of basic food prices, and energy and public transportation components which the man in the street can relate to easily.

Notwithstanding that the current CPI has its value for analysts, focusing on an inflation figure which is useful for the general population is also warranted.

Every cost increase has a knock-on effect, and rental expenditure and new car prices will eventually filter down to everyday cost of living, whether justified or not.

We have hundreds of thousands of foreigners who rent rooms and if their rental goes up, they will ask for higher wages.

Tackling inflation is a very complex task but we can try to mitigate its impact by publishing the relevant facts to allay people's concern.

Christopher Teng
ST Forum, 4 May 2012

'Using interest rates to cool domestic demand may be a better solution.'

MR YEO CHEE KEAN: 'Stating that higher certificate of entitlement (COE) premiums only affected 8,000 new-car buyers as the Ministry of Trade and Industry and the Monetary Authority of Singapore (MAS) did in their joint reply last Saturday, ('What Govt is doing to tame domestic inflation') ignores the spillover effect that has caused used car prices to go up in tandem with COE premiums.

Neither did the reply consider the multiplier effect on long-term inflation caused by higher COE prices. For example, the higher costs incurred by taxi companies replacing their fleets will result in higher taxi rental rates, which will eventually lead to higher fares.

A stronger Singapore dollar will cause Singapore and Singapore companies, especially the small and medium-sized enterprises, to lose their global competitiveness. In comparison, using interest rates to cool domestic demand may be a better solution.'

ST Forum, 4 May 2012