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Question:

Discuss about the Inflation in Singapore.
 
 

Answer:

Inflation in Singapore

Inflation is a crucial component of every economy. According to an article in The Strait Times, the inflation rate in the Singapore rose by 0.7 percent in February this year. The article, ‘Singapore consumer prices pick up pace with 0.7% rise in February but core inflation eases,’ narrates how the consumer price index in the country rose at the fastest annual pace in more than two years (Williams, 2017). More specifically, all-items inflation increased by 0.1 percent between January and February (Williams, 2017). Primarily, the country experienced upsurges in prices of food, services, and road transport costs. In turn, this led to the rise in the level of inflation in Singapore in February.

The Concept of Inflation

Essentially, inflation refers to the persistent growth in the general price level of commodities in a given country over a given period of time. Often, a sustained inflation leads to a loss of value of an economy’s currency. Predominantly, one can attribute this to the fact that as the general prices rise, each unit of currency buys fewer commodities. Hence, an upsurge in the level of inflation reflects a reduction in the purchasing power of the country’s currency. A rise in the consumer price index is thus an indication of the existence of a macroeconomic problem in the economy that needs to be addressed. Although a little inflation may be beneficial to the economy, sustained inflation is detrimental.

Predominantly, the Consumer Price Index is the main tool used in measuring the level of inflation in the economy. Mainly, it is constructed using the prices of a sample of representative commodities whose prices are collected over a period. In Singapore, it is used to index the real value of salaries, wages, pensions, and regulating the price level in the economy. Apart from the CPI, other commonly used price indices for measuring inflation comprise of Commodity Price Indices, Producer Price Indices (PPI), and Core Price Indices. Primarily, the PPI determines the average variations in prices received by manufacturers for their output. On the other hand, the Commodity Price Indices represents a weighted price measure of selected commodities. Lastly, the Core Price Indices are used to measure the inflationary impact if current monetary policy. Overall, high and unpredictable inflation rates are harmful to the general economy. Mainly, this is because high inflation results in inefficiencies in the market. It may reduce the productivity of companies as they are forced to shift resources away from manufacturing to concentrate on losses arising from inflation.

Discussion

Macroeconomic Challenges

It is imperative to note that inflation has significant consequences for the economy. Just like any other economy, inflation is one of the key macroeconomic challenges in Singapore.  Firstly, the general prices in the economy increase, making it expensive for consumers in Singapore (World Bank, 2017). As noted in the article, general prices in the economy rose by approximately 0.7 percent in the economy in February. Essentially, the inflation rose by 0.1 percent between January and February. It is imperative to highlight the fact that this rise in the nation’s CPI is the highest since September 2014 (Williams, 2017).  In isolation, private road transport costs in the country escalated by 7.1 percent in February following increases in the prices of petrol pump prices. In the same way, services inflation was recorded at 1.5 percent (“Inflation,” 2017). On the other hand, food inflation was estimated as1.3 percent (Kondo, 2017). Core inflation, which excludes the cost of private road transport and cost of accommodation was estimated to have risen by 1.2 percent during the same month, from a year earlier (Trading Economics, 2017).

 


Causes of Inflation

Primarily, inflation in the economy is as a result of various factors. Typically, inflation arises due to either excess aggregate demand in the economy or due to cost push factors. For this reason, inflation may be demand pull or cost-push inflation (“Causes of Inflation,” 2017).

Demand-pull inflation. By and large, this form of inflation arises when the level of aggregate demand in the economy increases over and above the overall supply of services and goods in the economy. As such, an increase in demand for commodities by Singapore consumers results in a shift in the aggregate demand curve while the supply of commodities remains constant. Consequently, this creates an upward pressure on prices, causing inflation.  


Source: (Amadeo, 2017).

Cost-push inflation. Basically, this arises when the producers in the country raise the price of their commodities following an increase in the price of factors of production. In the country, an increase in fuel prices results in an increase in production costs for firms. In turn, they respond to these increased costs by reducing their supply of services and commodities into the economy. Eventually, this leads to a shortage of commodities in the economy, forcing consumers to compete for the available products. Subsequently, this forces prices to rise, thereby causing inflation in the country.

Apart from the increase in production prices, the continued increases in the country’s minimum wages have led to the rise in inflation. Particularly, trade unions in Singapore bargain for higher wages for its members. The high wages play a significant role in pushing firms’ costs upwards. Therefore, to cater for these costs, firms reduce their supply or increase prices for their products. In turn, this creates inflation in the economy. Likewise, the recent depreciations in the country’s pound against the dollar has made import prices more expensive, thus leading to inflation in the country.


Source: (Amadeo, 2017).

Impact of Inflation

The rise in the level of inflation in February has had significant impacts on the economy and the Singapore society. Noteworthy, the rise in consumer prices was not accompanied by increases in the level of salaries and wages for the people of Singapore. For this reason, there has been a reduction in their real money (“Singapore,” 2017). As such, they cannot afford as many goods and services as they used to in January, since the pound has lost its purchasing power. In this regard, this inflation has caused a loss in the welfare of the people.

Policies to Control Inflation

In order to reduce the level of inflation in the economy, the government may institute a price control for essential consumer commodities. By doing so, the government will be able to control general prices from rising. In addition, it may adopt a rational wage policy for Singapore workers (Amadeo, 2016). This way, firm costs will significantly reduce, causing a reduction in the price of commodities. Furthermore, the government may adopt the policy of rationalization to increase productivity in industries in the country (“Controlling Inflation,” 2010). Over time, this will ensure that supply can meet increases in aggregate demand, thereby controlling the level of inflation in the economy. 

Conclusion

All in all, all factors considered, the economy of Singapore has been performing relatively well. However, the recent rise in the level of inflation has been significant. Predominantly, one can attribute this to the increase in the costs of private transportation, food prices, and services. Primarily, one may classify the inflation as cost-push or demand pull. The inflation has affected firms and households in Singapore given the fact that the purchasing power of the Singaporean currency has slightly reduced. Regardless, the government may control this inflation through rational wages, rationalization of local industries and price control policies. Eventually, inflationary pressures will be eliminated from the Singapore economy.

 

References

Amadeo, K. (2016). What Is Being Done to Control Inflation?  The Balance. https://www.thebalance.com/what-is-being-done-to-control-inflation-3306095.

Amadeo, K. (2017). Causes of Inflation: 2 Real Reasons for Rising Prices. The Balance. Retrieved from https://www.thebalance.com/causes-of-inflation-3-real-reasons-for-rising-prices-3306094.

Causes of Inflation. (2017). Economics Help.  Retrieved from https://www.economicshelp.org/macroeconomics/inflation/causes-inflation/.

Controlling Inflation. (2010). Economy Watch.  Retrieved from https://www.economywatch.com/inflation/controlling.html.

Inflation in Singapore. (2017). Focus Economics.  Retrieved from https://www.focus-economics.com/country-indicator/singapore/inflation.

Inflation, consumer prices (annual %). (2017). World Bank.  Retrieved from https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG.

Kondo, M. (2017). Singapore Dollar Bulls Are Gathering in the Swap Market. The Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2017-03-26/singapore-dollar-bulls-gather-in-swaps-as-mas-policy-meet-looms

Singapore (2017). 2017 Index of Economic Freedom.  Retrieved from https://www.heritage.org/index/country/singapore.

Singapore Economy. (2017). Countries of the World.  Retrieved from https://www.theodora.com/wfbcurrent/singapore/singapore_economy.html.

Singapore Inflation Rate. (2017). Trading Economics.  Retrieved from https://www.tradingeconomics.com/singapore/inflation-cpi.

Williams, A. (2017). Singapore consumer prices pick up pace with 0.7% rise in February but core inflation eases. The Straits Time. Retrieved from https://www.straitstimes.com/business/economy/singapore-consumer-prices-rise-07-in-february-fastest-annual-pace-in-over-two-years.

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