Whither inflation in Singapore?
There are many factors affecting inflation in Singapore today, which is expected to remain high in the 1st half of 2023.
We can break them down into Cost Push and Demand Pull causes. (If you are clueless what these mean, check out our Notes on Inflation and Deflation)
Cost push factors include the high food and oil prices as well as for other energy related commodities. This is in part due to the ongoing Russia Ukraine war. At any point in time, the conflict may escalate and we may face even higher prices. Weather shocks due to climate change have also been putting pressures on food production. This is another reason behind high food prices.
The Singapore government raised GST tax rates by 1% this year, so that is also a cost push factor. (GST is an Indirect Tax. Indirect taxes raise the cost of production.)
At the same time the government has expanded on the Progressive Wage Model and that is essentially pushing up the wages of low skilled workers so this is likely to increase cost and there may be some rippling effects as well, meaning that it will affect other industries indirectly.
As for demand pull, there appears to be a higher level of consumption in recent months due to the recovery from Covid pandemic. During the years of the pandemic, some consumption has been deferred and households accumulated a lot of savings. So now they have the means to spend more and maybe some are into revenge spending as well! Higher levels of consumption will increase inflation rates.
Where external demand is concerned, there is the China Factor. The Chinese economy is revving up its engine ever since they have stopped their Covid lockdown policies and that could mean higher demand from China for Singapore’s exports. The removal of many Covid restrictions also means a lot of Chinese buyers will be entering into the Singapore markets and that can result in much higher housing prices as well as tourism spending. More spending, higher inflation.
Probably due to tighter foreign worker policies, we are also experiencing shortages in our labor market, so all this increase in demand is exerting upward pressures on wages, contributing to the demand pull inflation.
Demand outstripping supply is also seen in the car and housing markets. Limited quota in the form Certificate of Entitlements (COEs) amidst high demand for cars (including from foreigners and car rental firms) have resulted in sky-high car prices. A similar situation has occurred in the housing market.
To learn more about the causes and consequences of inflation, check out our notes on inflation. For JC A Level and IB Economics, this is a very important topic and quite a complicated one as it affects many other macroeconomic aspects – wide reaching implications.
Students should be well versed with our latest Model Essay : Explain the recent causes of inflation in Singapore. (10marks) (accessible only by our students).
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