Inflation and cost of living: How concerned should we be?

Managing the pressure of inflation: How bad will it get and should you be worried?

By Tham Yuen-C, Senior Political Correspondent, The Straits Times, 5 Feb 2022

Despite efforts to bring down prices, inflation has continued to rise.

The core inflation rate, which the Government has said is a more accurate gauge for locals, hit 2.1 per cent in December 2021, year on year.

This is up from 1.6 per cent in November and 1.5 per cent in October, the month when the Monetary Authority of Singapore (MAS) raised the slope of its currency policy band to strengthen the Singdollar.

Around the world, prices are rising, putting governments under pressure.

In Singapore, Leader of the Opposition Pritam Singh highlighted the issue in his New Year's Day message, describing cost of living as a likely "major pressure point for many Singaporean households" in the year ahead.

Citing higher costs of many basic needs such as utilities, transport and medical insurance, he pledged that the Workers' Party will track what the Government does to support Singaporeans who need the most help.

MPs, too, have asked in Parliament for the Government to do more.

On Thursday (Feb 3), Finance Minister Lawrence Wong reiterated that the Budget will help Singaporeans manage concerns over the cost of living.

How bad will it get?

Economists say the situation is set to get worse before it gets better.

OCBC Bank's head of treasury and research Selena Ling reckons that core inflation may hit 2.8 per cent and stay at this elevated rate for most of the year.

MAS recently reviewed its initial core inflation forecast of 1 per cent to 2 per cent and bumped it up to 2 per cent to 3 per cent.

While this is nowhere as high as the core inflation of 5.2 per cent reached in 2011 and 6.5 per cent reached in 2008, Singapore has not seen such a rapid increase in prices since 2013 and 2014.

Price pressures may worsen as the recovery from the pandemic spurs demand, and a manpower crunch - due to border restrictions - pushes up wages, she adds.

Meanwhile, as factories roared back to life, the world experienced its biggest ever increase in electricity demand last year, pushing energy prices to record highs. The International Energy Agency expects the situation to persist for another three years.

Minister of State for Trade and Industry Low Yen Ling told Parliament last month that the Government expects global energy prices and bottlenecks in global transportation to ease gradually over the course of the year, meaning prices should come down.

Why is it a concern?

Inflation has different implications for different income groups.

Typically, those in the lower-income groups are the most squeezed when prices soar.

Spending on food makes up the bulk of their household expenditure, and with grocery prices rising, they will find themselves counting the cents to decide whether to purchase a bunch of kai lan or chye sim.

Singapore Management University law don Eugene Tan says low-wage earners, retirees, the sandwiched class and those reliant on the gig economy may find it hard to cope with the higher prices of essential items.

"Taken together, they are a large enough group to weightily add to the overall societal worries and unhappiness," he adds.

But MPs say that much of the impact on the bottom 20th percentile of households is offset by government handouts, such as U-Save rebates of up to $595 to help cover utilities bills and public transport vouchers of $30 each to help with transport costs.

There is also income support, such as Silver Support of between $720 and $3,600 per year for seniors who had low incomes in their working years, and the Workfare Income Supplement of up to $4,000 per year in cash for lower-wage workers.

Meanwhile, the middle-income earners could find their purchasing power eroded.

National University of Singapore (NUS) sociologist Tan Ern Ser says inflation may hit some middle-income Singaporeans "geared up to live the Singapore Dream".

He cites how they may find big- ticket items like cars and homes - whose prices have been rising - edging beyond their reach.

"I reckon the middle class would have to learn to live within their means and, for those married, to stay the course of being high-earning dual-income couples," says Associate Professor Tan.

Former People's Action Party (PAP) MP Inderjit Singh, who was in Parliament from 1997 to 2015, warns of political implications.

"It will hit the middle-income group the most and when it does, these are the swing voters who can make a difference at a general election," he says.

What price to pay?

The link between rising prices and their political fallout has been seen globally.

In the US, where inflation has hit 7 per cent, political watchers are already predicting that it will become a political problem for President Joe Biden during the mid-term elections to be held in November.

While Singapore did not experience runaway inflation before the 2011 General Election, SMU's Prof Tan and NUS' Prof Tan say cost-of-living issues had contributed in part to the ruling PAP's worst showing since independence.

"Not doing enough to deal with inflation can be regarded as being indicative of the government's tone-deafness to the average person's daily concerns," says SMU's Prof Tan.

MPs such as West Coast GRC's Mr Ang Wei Neng have heard residents complain about the higher electricity bills and more expensive hawker food.

To help residents who cannot cope, he has raised $100,000 for food for 200 vulnerable households. Children from rental flats get vouchers of up to $60 to join a tuition programme.

Meanwhile, raising wages is the key to helping the middle-income earners, who typically do not qualify for much government aid, says Bukit Panjang MP Liang Eng Hwa. He adds that there has to be sufficient subsidies to help this group afford housing, education and healthcare.

In fact, Singapore University of Social Sciences' associate professor of economics Walter Theseira says the combination of inflation and stagnant wages is the real issue.

It can be overcome if firms do well and raise wages soon. "People will grumble, but in six months to a year, nobody will say much any more because they are enjoying real wage growth," he adds.

Even after accounting for inflation, workers enjoyed real wage growth last year, with real median income of full-time employed residents rising 1.1 per cent, and for those at the 20th percentile, rising 4.6 per cent in 2021, Ms Low told Parliament.

Impact of GST hike

Price spikes caused by external factors are not the only concern. The impending hike in goods and services tax (GST) also looms large.

Prime Minister Lee Hsien Loong said during his New Year's Day message that the upcoming Budget will have to "start moving" on the matter, first announced in 2018 and due to take place by 2025.

Sengkang GRC MP Jamus Lim, from the Workers' Party, citing the experience of Japan, said in a Facebook post last month that the GST increase from 7 per cent to 9 per cent could "add fuel to the fire", sparking inflation and stalling gross domestic product growth.

Indeed, inflation could get worse, says Ms Ling, if companies start to price in a more than 2 percentage point increase in prices.

Companies that could not pass on their higher operating costs to consumers over the past two years may do so now due to the better economic conditions, she adds.

At the same time, if consumers expect prices to rise faster, they could also start hoarding, driving up prices even more.

Prof Theseira says that regardless of whether this eventually plays out, there will be the inevitable perception that the increase in GST will fuel higher prices.

He puts it down to this: "People don't like the idea of government policies further increasing prices at a time when they feel prices are already rising faster than they can cope with."

Mr Liang believes that the $6 billion Assurance Package set aside will go some way in addressing people's concerns, since it will stave off the tax increase for five years for most households and 10 years for lower-income households.

"What's important is that this offset helps to safeguard the purchasing power of Singaporeans," he says.

Prof Theseira says that any economist would generally agree with the Government's approach of raising the GST while providing the Assurance Package to mitigate the impact on lower-income earners.

The problem is that many people will not make the connection between the offsets and the price increases, since sticker shock hits immediately, but such subsidies typically get deposited into people's bank accounts once a month.

But Prof Theseira says he is not in favour of a delay, which will just kick the can down the road.

Instead, he suggests that the GST hike be packaged with other tax increases such as for wealth taxes, for instance.

"My view is that the GST increase can be packaged with other tax adjustments so people can see that we are collecting from groups that have benefited a lot from the last couple of years," he says, citing studies that show those in the top income groups have benefited the most from Covid-19.

What is inflation and why are prices rising?

By Prisca Ang, The Straits Times, 5 Feb 2022

Inflation is once again on the rise around the world and Singapore has not been spared. The Straits Times answers three big questions about the forces driving up prices.

Baking a cake or making a cup of tea has become more expensive over the years if you use fresh milk.

A litre of it cost around $2.80 five years ago, but it cost about $3.20 three years ago and nearly $3.40 last year.

The same effects can be seen in a range of other products and items, from food to electricity, in recent months owing to both local and external factors.

Inflation refers to a general rise in the prices of goods and services without an improvement in their quality. It also excludes seasonal price gains such as those during the Chinese New Year period.

There are two main causes of inflation: demand-pull and cost-push. The first is the most common and occurs when the demand for goods and services in an economy rises more rapidly than the capacity to supply them.

Cost-push inflation happens when the cost of production and raw materials increases due to reasons such as short-term supply shocks.

Inflation in Singapore climbed to new highs in December, beating economist estimates and prompting the Government to review its inflation forecasts for this year.

Headline or overall inflation stood at 4 per cent - the most since February 2013 when it surged to 4.9 per cent.

Core inflation came in at 2.1 per cent - the highest since July 2014's 2.2 per cent. This indicator strips out accommodation and private transport costs, which tend to be volatile, and better captures the underlying trend in consumer prices.

Inflation is not necessarily bad - a moderate amount of it encourages consumption and investment.

People will buy big-ticket items if they think prices will rise if they wait too long. Likewise, businesses will invest in equipment and land if they expect higher asset prices and they will boost hiring if they view an increase in wages.

The Monetary Authority of Singapore notes that on average, a core inflation rate of just under 2 per cent is close to the historical mean and consistent with overall price stability in the economy.

Singapore recorded 12 consecutive months of negative core inflation - or prices that were lower than a year ago - amid the Covid-19 outbreak. The spell was broken in February last year.

On the flip side, persistently high levels of inflation can weaken consumer purchasing power and cut margins for businesses by depriving them of their pricing power.

December's inflation was mainly driven by a sharp uptick in airfares owing to higher base fares and additional costs of mandatory Covid-19 tests for vaccinated travel lane flights. The increase buoyed services inflation.

Inflation has also been helped by other factors: increasing consumption from recovering economic activity worldwide; supply disruptions from the likes of congested ports and severe weather events; and rising wages as the labour market strengthens.

Businesses may defend their market share by choosing to absorb all or part of the additional costs increases, but they might have to raise prices if inflation remains high or continues to rise.

Amid inflation, why are prices up more for some groups of people?

By Prisca Ang, The Straits Times, 5 Feb 2022

Horticulturist Loo Jun Liang only has to look at the small amounts he forks out daily to see how big the threat of inflation is looming in his life.

Take mee pok at a coffee shop near his home. That used to be $3 but has cost $3.50 since last December, while sweet treats like Coolish ice cream is now $2.50 at supermarket chain Don Don Donki, up from $1.90.

It might be only a few cents here and there, but Mr Loo, 25, is concerned: "I'm still able to cope with the higher prices but they make me worry about the future when I have to buy my own home."

There are plenty of consumers like him who are also feeling the pinch of rising prices, with some experiencing the sting more keenly than others, depending on what they buy.

Someone who tends to buy more clothes might have found cheaper items amid declining prices of retail goods, but if food takes up a larger share of their budget, they are likely more aware of inflation.

Food prices rose 2.1 per cent last December compared with the same month a year earlier, largely due to costlier non-cooked items.

They were also up 1.9 per cent in November and 1.7 per cent in October.

Ms Huang Jia Li has noticed pricier fast food in recent years. She recalled how a two-piece chicken meal at KFC was $8 in 2019 but now costs $10.60.

And her monthly utility bill rose to $250 in the last quarter of 2021, up from $235 previously.

"I'm still managing as I'm in full-time employment and so is my elder daughter who lives with me, but we try to cut back on luxuries like food deliveries," said Ms Huang, who is 49 and works in education.

Electricity and gas have seen sharper hikes since October amid a global energy crunch.

Prices surged 10.7 per cent in December, up from November's 10 per cent increase and October's 7.8 per cent rise.

West Coast GRC MP Ang Wei Neng said residents have complained that higher electricity costs are hurting their pocket, and some also reported an increase in food and coffee prices.

"Hawkers are experiencing an increase in utility and raw material prices, as well as higher manpower costs. Quite a number of stalls have thus increased the selling price," he added.

The impact of inflation also varies across households with differing incomes.

The lowest-income group saw the smallest increase in consumer prices in the second half of last year, compared with those from the middle and higher income groups, noted Department of Statistics data.

Overall inflation for those whose household incomes were in the lowest 20 per cent bracket rose 2.4 per cent year on year.

This compared with 2.7 per cent for the middle 60 per cent in household income and 3.7 per cent for the highest 20 per cent.

Rising car and petrol prices had less impact on those in the lowest 20 per cent of household incomes as these items made up a smaller share of their expenditure.

Singapore Management University assistant professor of finance Aurobindo Ghosh noted that inflation of essential items was higher for those from the lowest 20 per cent bracket.

Food inflation was 1.8 per cent for that group, compared with 1.7 per cent for the middle 60 per cent and 1.6 per cent for the highest 20 per cent.

Housing and utility prices rose 3.2 per cent for those from the lowest income bracket, versus 2.8 per cent for the middle income and 2.1 per cent for the highest income groups.

"The lowest quintile group might suffer the most from rising prices as a greater proportion of their budget is spent on essential items," said Prof Ghosh, adding that they have less savings and investment to mitigate inflation.

Pricier fuel and distribution costs, as well as a stronger US dollar, which means costlier items like oil, have created a perfect storm, sending food and energy prices up, he noted.

He said: "The main tool to counter inflation that the lowest-income group has is reducing discretionary spending."

Does inflation mean consumers have to keep paying more?

By Prisca Ang, The Straits Times, 5 Feb 2022

Inflation does not mean consumers have to accept higher prices and resign themselves to having lower purchasing power.

Hedging against inflation is easier said than done but people can take a multi-pronged approach to protect themselves, said Singapore Management University (SMU) assistant professor of finance Aurobindo Ghosh.

Controlling spending and focusing more on needs are essential at such uncertain times, he noted, adding that it is important to understand saving and investment needs. "There is a need to have access to emergency funds but, beyond that, savings should be prudently invested in a diversified asset portfolio."

Prof Ghosh, who is also director of the Citi Foundation-SMU Financial Literacy Program for Young Adults, said that people could also pay back debt that carries higher interest rates and refinance loans before rates go up further.

People are already finding ways to make their dollar stretch.

Education-sector worker Huang Jia Li has cut back on food deliveries, opting instead for home-cooked meals or takeaways from hawker centres.

She also tries to take the bus or train where possible instead of a cab or private-hire car.

"Aside from tightening our belts, I am opting for a regular forced savings model and just bought an insurance policy where its main purpose is to grow one's savings," said Ms Huang, 49.

"A small percentage of my salary is deducted every month and channelled into this savings plan."

Research engineer Muhammad Adri Abu Bakar, 31, is also taking on inflation: "At one point, I was investing up to 70 per cent (of my income) in a wide range of assets like funds, equities and an endowment plan, but not anything high-risk."

He has since increased his savings so he has cash on hand to foot the down payment on his own home after his rental lease ends.

Sharing a flat with two friends has also helped to reduce his rent from $850 - when he previously rented a room by himself in the same area - to about $750.

However, it is not entirely up to consumers to figure out how to cope with rising prices.

Singapore has a small and open economy where almost 40 cents of every dollar spent domestically go to imports.

The Monetary Authority of Singapore (MAS) manages the exchange rate, which allows it to keep a lid on imported inflation.

With inflation rising faster than expected, the central bank took the unusual step last month of tightening its monetary policy stance in between its regular policy meetings, which occur in April and October.

It took the first step last October when it shifted to a gradual appreciation path for the Singdollar, from zero per cent previously.

A stronger Singdollar dampens the inflationary impact of higher import prices.

Most economists reckon that MAS is not done with tightening yet and expect another move in April.

The Government has also given assistance through the likes of Goods and Services Tax (GST) Voucher - U-Save rebates of up to $595 last year to help with household utility bills.

It also said the impact of the upcoming GST hike - from 7 per cent to 9 per cent - will be delayed for the majority of households in Singapore through the $6 billion Assurance Package, which will be disbursed alongside the GST increase.

More details about the hike are expected to be announced at the upcoming Budget.

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