Sunday, 24 February 2013

Measuring cost-of-living changes: MTI replies

THE article ("Poorest households hardest hit by inflation", Feb 6) noted that if imputed rentals on owner-occupied accommodation (OOA) are excluded from the Consumer Price Index (CPI), inflation for lower-income households last year would be lower than that for other groups.

However, the article also cited views that "CPI-All Items" provides a better picture of cost-of-living changes than the measure excluding imputed rentals on OOA, since rentals and mortgages are significant expenditures. Allow us to clarify.

First, rentals paid by tenants are separate from imputed rentals on OOA, and are fully reflected in both the CPI indices.

Second, imputed rentals are not a good reflection of mortgage payments. As housing market cycles and interest rate cycles can differ significantly, the trend in imputed rentals often deviates from that in mortgage payments. For example, while rental costs have increased, mortgage interest rates have remained low in recent years.

The measurement of the cost of OOA is internationally recognised as the most difficult aspect of measuring CPI.

While measuring accommodation costs of rented homes is straightforward, home owners do not pay rent and, thus, their housing consumption is unobserved.

To address this, statisticians have developed several methods to measure the cost of OOA. Each has its pros and cons.

Singapore uses market rentals of similar homes as a proxy for the costs of OOA.

However, because our rental market has seen significant fluctuations, the methodology results in a highly cyclical CPI. The fluctuations in imputed rentals do not reflect the actual expenditure of owner-occupiers, who in Singapore comprise the large majority of households.

This is why the Department of Statistics also compiles the alternate measure of "CPI less imputed rentals on OOA", which relates more directly to households' actual cash spending.

Several other countries do likewise. In Britain, the CPI excludes OOA, while the Retail Prices Index includes it. Some other European countries exclude OOA altogether from the CPI.

An alternative measure of OOA is based on mortgage payments. However, mortgage payments reflect both the investment value of a home and its consumption cost.

Separating the investment component, which is not part of the CPI, from the cost of consumption is a difficult matter, involving onerous data requirements. Few countries have chosen this approach.

We are continuing to review the measurement of OOA in the light of these considerations, including possible ways to minimise the cyclical component of imputed rentals that has no bearing on actual expenditures.

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

Poorest households hardest hit by inflation
Rising housing and health-care costs pushed up their living costs by 5.6%
By Fiona Chan, The Straits Times, 6 Feb 2013

SINGAPORE'S poorest bore the brunt of inflation last year, as higher housing and health-care costs hit them particularly hard.

Households in the bottom one-fifth income bracket were hit by a 5.6 per cent rise in their cost of living, higher than the 4.6 per cent average increase for the whole country, according to figures released by the Singapore Department of Statistics (DOS) yesterday.

For the richest one-fifth of households, the cost of living rose by only 4.2 per cent.

This is a turnaround from 2011, when the lowest-income households enjoyed lower inflation than the average.

Rising housing costs were the main reason for the change, as these tend to take up a larger proportion of poorer households' incomes. From 2011 to last year, they were the only group that saw a rise in housing inflation.

If imputed rentals from housing costs had been excluded, however, inflation for the poorest households would have been slightly lower than for other groups. Imputed rentals are the Statistics Department's own estimate of home values and do not actually figure in home-owners' cash spending.

But economists think the overall inflation figure, including imputed rentals, provides a better picture of the true cost of living.

"Housing is the largest expenditure item most households will have to spend on, be it in the form of rentals or mortgage payments," said Barclays economist Joey Chew.

The lowest-income group spends more than a third of their total expenditure on housing, while other groups spend about a quarter.

Excluding imputed rentals thus "runs the risk of underestimating the full extent of the inflationary impact of the property market on the cost of living", said DBS economist Irvin Seah.

Health care was another relatively bigger burden on lower-income earners last year.

Not only did they see the sharpest percentage rise in health-care costs across all income groups, they also felt it more acutely as they spend a bigger proportion of their income on health care, said UOB economist Francis Tan.

"Health-care costs are on the rise due largely to labour cost pressures," said Ms Chew, who expects inflation in this area to remain "stubbornly high" this year.

She noted that the rise in health-care costs accelerated last year from 2011. On average, consumers paid 4.5 per cent more for health care last year, compared with 2.4 per cent more in 2011.

But the news is not all bad for lower-income households. They saw a smaller rise in food and transport prices than richer households last year, and the gap between their inflation levels and the overall average also narrowed in the second half of the year.

Inflation in July to December last year was 4.8 per cent for the poorest one-fifth of households, down from 6.3 per cent in the first half. The average rate for the country overall was 4.1 per cent in the second half, compared with 5.1 per cent for the January to June period.

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