What the Consumer Price Index doesn't cover

Why housing prices are not included in the CPI and what goes into food inflation

The Straits Times, 12 May 2012

FOOD inflation was 2.7 per cent in March, but seems higher than that to some consumers. Why don't the numbers reflect the consumer experience?

The weights given to different types of food in the CPI basket are supposed to reflect the dining habits of the average Singaporean consumer, based on the results of a Household Expenditure Survey conducted every five years.

Currently, prepared meals account for around 60 per cent of the food basket in the CPI. The remainder is made up of other food items such as rice, meat and vegetables.

The most recent survey was done in 2007 and 2008 and will be updated later this year.

Different food items have seen rather varied price changes as well, meaning that the consumer's experience of food inflation depends on his or her diet.

Prices of items such as broccoli, grapes, tomatoes and large prawns fell between 5 per cent and 8 per cent year on year.

At the other end of the spectrum, someone fond of sea bass, apples, cheese and small prawns would have to fork out 7 per cent to 10 per cent more.

Dining out and hawker food prices are included in this measure. In March, hawker food prices, including those at food courts, also went up 2.4 per cent whereas restaurants were charging 4 per cent more.

Why aren't housing prices captured in the Consumer Price Index?

The CPI covers only consumption expenses, not investment expenses.

House purchases are excluded because they count as both a consumption expense and an investment expense.

This is because while consumers use the house for shelter, which counts as consumption, the house is also a capital asset that can be bought and sold later on.

Since property can be used for investment, the value of the house goes up and down based on market conditions.

Including house prices in the CPI would thus introduce capital gains and losses into the index.

Another factor is that measuring the consumption expense associated with house purchases is tricky.

If a house is sold for a profit, the seller's cost of consuming housing services from the house would be calculated to be negative, which does not make sense.

Shouldn't the CPI include the consumption expense from housing?

The CPI does try to capture the consumption cost associated with housing.

This is done via a gauge called 'owner-occupied accommodation cost'.

This cost, which accounts for 15.6 per cent of the CPI, is estimated using actual market rental rates, a practice that is widely adopted internationally.

But because most consumers here do not pay housing rents as a cash outlay, the Government also publishes a CPI indicator that excludes the owner-occupied accommodation cost.

This extra indicator is a useful reflection of the inflation actually experienced by consumers, because it strips out the volatility of the property market in Singapore from the overall CPI.

Inflation gauge may be reviewed more often
By Melissa Tan, The Straits Times, 12 May 2012

THE Department of Statistics may consider reweighting the individual items tracked in the key inflation gauge here more often, it said yesterday.

But it will do so only after the results of the upcoming Household Expenditure Survey are out.

Currently, the weighting assigned to each component in the consumer price index (CPI) basket is reviewed every five years. The review is done after conducting the survey.

Households are asked about their consumption behaviour in order to figure out the consumer experience of an average household.

If household spending patterns have changed markedly from five years ago, the weightings assigned to different items in the CPI will be adjusted to reflect that.

But the Department of Statistics warned that it would have to balance the 'incremental benefits' of more frequent reviews 'against the burden which will be placed on the survey respondents'.

The survey 'requires considerable efforts from households', it noted.

For each household participating, every member aged 14 years and above has to provide a complete record of his daily household and personal expenditure for two weeks.

On top of that, households have to record all regular expenses incurred every month, quarter and year.

Major and less frequent expenses such as vacation travel also have to be noted down.

The most recent household expenditure survey was conducted from 2007 to 2008, and the CPI basket was recalculated in 2009.

The next scheduled survey will begin in October and will be conducted over a period of one year.

The Department of Statistics said it typically reviewed whether to have more frequent surveys after the results of each survey were released. 'As with the conclusion of every Household Expenditure Survey, DOS (Department of Statistics) will be reviewing whether to have more frequent surveys after the results are available.'

Citi economist Kit Wei Zheng noted that 'the CPI basket represents a broad swathe... which could lead to scepticism from the man in the street' since it is less likely to reflect any individual's consumer experience. He added that updates 'could be a little more frequent'.

Singapore reviews the CPI basket weightings less frequently than major developed countries.

In the United States, the basket is reviewed every two years by the Bureau of Labour Statistics.

In Britain, the Office for National Statistics reviews the CPI basket every year.

But OCBC Bank economist Selena Ling said there was no need to update Singapore's CPI basket every year as people were 'creatures of habit'. 'I don't think the mainstream average consumer's tastebuds change that much... the top three biggest components are still going to be the same few culprits: housing, food and transport.'

Added Barclays Capital economist Leong Wai Ho: 'The best option is to stick to a... consistent set of rules and resist the temptation to tweak (the basket) simply because inflation has gone up beyond expectations. Countries in the region that have done this in the past have shed credibility in the eyes of investors.'

SIZING UP INFLATION

Prices likely to go up before adjusting

Economists say rise of between 3% and 4% expected in next few years

By Aaron Low, The Straits Times, 12 May 2012

HIGHER inflation is likely to stick around for a few years as Singapore's economy undergoes restructuring to raise productivity, said economists yesterday.

Prices should keeping rising between 3 per cent and 4 per cent in the next two to three years, but inflation is unlikely to stay at the current 5 per cent rate.

Eventually, inflation will return to the stable and low rate of 2 per cent although it may take a while, said economists.

Last year, inflation hit 5.2 per cent for the whole year and continued to hover around that level for the first three months of this year.

The persistence in higher prices has led to the central bank raising its inflation forecast this year to between 3.5 per cent and 4.5 per cent.

OCBC economist Selena Ling said that a number of factors are combining to make the current inflation environment 'extraordinary'.

She noted that, apart from last year, there were only three other instances of inflation rising past the 5 per cent rate in the past 30 years.

One was in 2008, when the cost of food soared as a result of bad weather, and back in 1980 and 1981, when there was a deliberate policy to raise wages by 20 per cent over three years.

This time, Singapore faces price pressures both internally and externally.

Interest rates are depressed globally, so investors are moving funds to emerging markets in search of better returns. Singapore has had a huge inflow of funds into property and shares, for instance.

Higher prices of assets such as property are filtering through to higher prices via rentals, noted Bank of America Merrill Lynch economist Chua Hak Bin.

There is also geopolitical tension in the Arab world, which has kept oil prices well above US$100 per barrel.

Likewise, at home, supply constraints continue to tighten, with the Government cutting back on the supply of foreign workers and the number of cars.

Already, basic services such as education and health care have seen larger than usual price jumps in the past six months.

As inflation is pushed up on multiple fronts, Citigroup economist Kit Wei Zheng said the central bank faces a tricky job in dealing with homegrown inflation.

The Monetary Authority of Singapore has said that allowing a rising Sing dollar can help to deal with external inflation by making imports cheaper.

But a stronger Sing dollar cools the local economy by making exports more expensive, which in turn reduces demand for resources at home.

'Over-reacting to inflation caused by higher wages may help to keep down headline inflation numbers, but if the resulting impact on aggregate demand results in a sharp fall in employment and wages, it ultimately goes against the broader objective of raising median wages and the wage share of gross domestic product,' he said.

But the current pace of inflation, at about 5 per cent, is unlikely to last for long, as this means an unlikely doubling of accommodation costs and certificate of entitlement premiums, said Ms Ling.

Accommodation and private car transport account for more than half of current inflation. Take these out, and core inflation is 2.9 per cent. This core rate, however, is still much higher than the historic rate of less than 2 per cent.

OCBC's Ms Ling expects inflation to taper slightly to around the '4 per cent handle in 2013, and probably closer to the 3 per cent region afterwards'.

Likewise, Mr Kit said: 'I think we will start to see inflation come down closer to 2 per cent levels when productivity finally catches up and completely substitutes for lower labour force growth.'

This he said, might take two or three years, depending on how fast firms adapt.

But Dr Chua was less sanguine about the prospects of falling inflation.

'This is probably an extraordinary time. A confluence of forces is coming together to drive inflation,' he said. 'But unfortunately these forces are likely to persist, and not disappear any time soon.'

There is also a small risk that the high inflation rate now could feed into itself, raising inflation expectations and disrupting price stability.

For instance, with inflation at 5 per cent now, landlords renewing their leases with tenants could raise rents by a similar 5 per cent, which translates into higher business costs and fuel inflation further.

UniSIM senior lecturer Tan Khay Boon said that high inflation now may provide a justification for sellers to lift prices and workers to raise wage demands.

'However, as the inflation rate of 5.2 per cent only occurred in March and there are policies to deal with the inflationary pressure, people's inflationary expectations may change if these policies can bring down inflation significantly,' he said.

Parliament to hear worries about cost of living and wages
By Goh Chin Lian, The Straits Times, 12 May 2012

THE cost of living, inflation and wages in Singapore will be uppermost on the minds of many MPs when Parliament sits on Monday (14 May).

They have been receiving feedback from their residents about higher food prices, heftier electricity bills and the prospect of public transport fares going up again next year.

Mr Ang Wei Neng (Jurong GRC), said: 'Many residents tell me the prices of many items continue to go up even after Chinese New Year in January.'

Added Mr Lim Biow Chuan (Mountbatten): 'People are constantly saying they are anxious that the cost of living is going up, like food prices and fuel prices leading to higher electricity bills... At the back of their minds is what can be done to moderate the increases.'

Like Mr Ang, he wants Trade and Industry Minister Lim Hng Kiang to tackle inflation and ease up on government taxes and charges.

In all, five questions on inflation and cost of living have been tabled, including those from Non-Constituency MP Yee Jenn Jong, and Nominated MPs Teo Siong Seng and Mary Liew, according to the Order Paper listing the questions and Bills to be discussed in Parliament.

There is growing anxiety over inflation, said MPs, despite Deputy Prime Minister Tharman Shanmugaratnam saying the average man in the street would not feel the full impact of the 5.2 per cent headline inflation in March.

The reason he gave is that the high cost of cars and home rents made up more than half of the increase, but most Singaporeans owned their own homes and were not buying a new car.

Mr Ang is calling on the Government to address inflation arising from land cost, property prices, government charges and Certificate of Entitlement (COE) premiums that motorists must obtain to own a vehicle.

If inflation remains high this year, he said, one-off measures to help the lower- income group should be considered.

Mr Lim suggests that the Government also monitor rents for shops and industrial properties, and consider rebates for property taxes.

Mr Teo will ask the Government to consider reviewing and reducing all its taxes and charges to curb rising business costs.

He is eyeing, in particular, the Electronic Road Pricing charges levied on motorists each time they use certain roads.

Although the charges are meant to curb congestion on busy expressways and in the city area, Mr Teo, the president of the Singapore Chinese Chamber of Commerce and Industry, said some of his members who run goods vehicles find the charges too huge a burden.

'Some members also can't afford to renew their fleet of vehicles,' he added.

The impact of inflation on the country's long-term goal to grow real wages by 30 per cent over 10 years is a concern for Mr Ang and Mr Yee of the Workers' Party (WP).

Other questions in the Order Paper released by Parliament yesterday include those on the Government's role in lifting the wages of low-income Singaporeans.

WP chairman Sylvia Lim (Aljunied GRC) will ask if it is tailoring solutions to grow wages in sectors where wage increases lag productivity gains, while Ms Foo Mee Har (West Coast GRC) wants to know the measures for ensuring that workers get a share of profits from productivity improvements.

Said Ms Lim: 'Since the government plan for wage growth is centred on improving productivity, it is important to have some interim report card on what the data and experience show so far.'

Also scheduled to be introduced are four Bills on the laws relating to HUDC housing estates, patents, intellectual property and land transport.