Domestic costs drive inflation, not import prices

For a long time, the Monetary Authority of Singapore (MAS), our central bank, has used the management of the Singapore dollar exchange rate as the chief tool to influence inflation locally. It argues that since Singapore’s economy is so open to external trade, inflation tends to come in via rises in prices of imported goods. By shifting our exchange rate up or down, MAS compensates for changes in import prices, thus moderating inflation.

An economist from the National University of Singapore says this is less than half the story. His conclusion is that managing the exchange rate is not good enough for the task.

In an article published in the Straits Times, 29 July 2010 (headlined: Rising Sing$ may not keep prices low), Tilak Abeysinghe dealt with the question: Why are consumer prices rising while the Singapore dollar is appreciating and import prices are falling?

His answer opened with these words:

From 2006 till last year, consumer prices rose by 3.1 per cent annually while import prices fell by 2.3 per cent. Last year alone, import prices fell by a hefty 8 per cent, while consumer prices went up by 0.6 per cent. The general trend of import prices since 1981 has been downwards and consumer prices upwards. Given Singapore’s extreme dependence on imports, this has puzzled some.

My co-researcher Choy Keen Meng and I examined this puzzle and found, somewhat unexpectedly, that non-tradeables account for 55 per cent of Singapore’s consumer price inflation, while import prices account for the rest.

Further down, he explained what he meant by non-tradeables. These include labour costs, rental and storage costs, government fees and charges and so on, he explained.

What he is saying therefore is that even as we manage to enjoy lower import prices through the deliberate strengthening of the Singapore dollar, this is more than wiped out by increasing domestic cost elements such as salaries, rents and payments to the government. The result is that we still continue to suffer inflation.

So why not strengthen the dollar some more until it balances out domestic cost increases? There’s a limit to how far the dollar can strengthen; at some point, it will severely affect our export competitiveness.

Abeysinghe was too polite to discuss the far-reaching implications of his findings, especially on policy, but they are not hard to see.

Firstly, the long-standing belief that inflation is mainly the result of external price movements may have blinded our policy-makers to the true impact of domestic cost pressures. Has our government been raising fees and charges, and pushing up land prices in the mistaken belief that these do not have much impact on inflation?

Secondly, if salaries are another domestic cost component that has been pushing up prices of goods and services in Singapore, this begs another question: whose salaries? In 2009 when we faced a worldwide recession and Singapore’s GDP contracted an inflation-adjusted 1.3 percent, the median household incomes of all sectors (by housing type) fell. However, those living in more modest homes suffered the greatest contraction in income. Here are data from a paper titled Key Household Income Trends 2009, from our Statistics Department.

Note: the dataset is restricted to households with at least one working member. “Real change” means after adjusting for inflation.

What you see in the table is part of a much longer trend wherein the income gap widens year after year. There is a tendency for salaries to increase more for those already earning more, or in the case of 2009, to decrease less when bad times hit. But salary-rises feed into overall inflation, and inflation affects the poorer segments of society disproportionately. This is because they spend a larger portion of their income. The rich save a substantial part of their income, putting it into interest-bearing or dividend-producing assets.

Then there is the huge influence that the government has over land prices. They impose massive redevelopment charges when an owner wishes to redevelop a piece of land for more intensive use while empty parcels of land are not auctioned off until a minimum bid price is reached. This minimum bid price appears to be quite arbitrarily set. Between them, the ever-rising cost of land results in rents going up inexorably, cyclical downturns excepted.

In turn, land for public housing are then revalued to catch up with notional “market” values (which as explained in the preceding paragraph are heavily affected by government action), and the selling prices of flats marked up accordingly.

In other words, the government’s failure to act effectively on inflation hurts the less well-off particularly hard. The belief that tackling inflation is a job that can be left to the MAS managing the exchange rate is misplaced. There are plenty of domestic cost pressures, many related to government policies, that have a greater effect.

30 Responses to “Domestic costs drive inflation, not import prices”

  1. 1 Leo's Daddy 3 August 2010 at 18:55

    Extract below from email sent last week which mentioned
    the pretty revealing/important article in ST by
    T. A.

    On a related topic, you may wish to look at the daily cost (without subsidy)
    at Hospices in Singapore. See page 14 of ST’s MIND YOUR BODY today, 29 July.

    First impression confirmed the sentiments about “the high cost of dying”
    in Singapore i.e. about S$200 daily till you passed on from a Hospice!

    The same copy of ST on page A28 hints of a way out with Economist
    Tilak Abeysinghe talking about the high prices due to non-tradeables
    such as rental and government charges.

    If policy makers (current and potential) are genuine in helping
    the old auntie lying in the dark/voters, look at the cost of utilities
    in Singapore. It should be a good place to start as many in
    Singapore will support a more reasonable charge for
    electricity and water. Policy makers should explore
    creative ways to keep the charges low rather than extract the market
    price (with profit) from citizens.

    Thanks for listening.

  2. 2 yuen 3 August 2010 at 20:17

    your table says household income has not been increasing, so price rise could not be due to manpower cost by and large

    if “labour costs, rental and storage costs, government fees and charges and so on” account for 55% of inflation, then “rental and storage costs, government fees and charges etc” must have increased a lot in 2006-9, since the 45% contribution from import prices was negative and salaries was stagnant

  3. 3 Mat Alamak 3 August 2010 at 21:41

    “In other words, the government’s failure to act effectively on inflation hurts the less well-off particularly hard.”
    – Yawningbread

    But what is even more puzzling is why the PAP continues to enjoy majority support at every election, if the less well-off are assumed to be the majority.

    Or is it the less well off are a minority? Maybe the PAP knows better, because they have the population data and statistics as well as a strong grassroots intelligence gathering apparatus.

    In other words, with these overall knowledge and data they know what is going on and what is tolerable without affecting peace and stability, contrary to what their online or offline critics think.

    After all politicians look at the big picture, get a sense of proportion and make their decisions accordingly. Hence those who suffer most are the unfortunate ones and of little or no consequence to social peace and political stability. Hence they are not much of a concern to politicians.

    • 4 sebastian 5 August 2010 at 11:15

      “But what is even more puzzling is why the PAP continues to enjoy majority support at every election, if the less well-off are assumed to be the majority”
      Just a few reasons
      (1) State-controlled Media which glorify PAP’s achievements and censored news that put bad light on PAP.
      (2) Use of ISD and defamation laws on opposition members and the fear factor instilled on public to prevent ppl from joining opposition.
      (3) Least priority and allocation of resources to opposition’s constituency.
      (4) PAP fed propaganda to students
      (5) GRC deliberately modified for electoral purposes, thereby producing a contorted or unusual shape – Gerrymandering in short
      It is no wonder that Singapore Citizens are often retorted as ignorant. Just look at our State Controlled Media and the frequent lawsuits by PAP to ensure ppl are obedient and do not ask questions. Continue to vote for PAP and Singapore is going to be doomed

      • 5 rojakgirl 5 August 2010 at 15:09

        I refuse to say too much but from what I know, some of those Singaporeans(not all, lots are still very pro-PAP) who travelled abroad to work for years, find local Singaporeans a little like the “frog in the well”.

        This is the only developed country that will tolerate having FTs/old men/women working as helpers/servers/in the refuse centre for “dirt low salary”, while the rest of the locals conveniently ignore them and cook up excuses when confronted by others.

        I’ve got an internet friend who’s around 70/80 years old. I wonder what he would think of the poor sods. =/

        Btw, does anyone remember that in the 80s to 90s, you’d often find old people hanging around in the hawker centres waiting to grab up the “leftovers that you couldn’t finish”? Some of them were so scrawny, they were almost skeletal. Could almost compete with starvation victims from Africa/North Korea/etc. I know this trend started again for a while in the mid/late 90s but I haven’t seen this happen for a good while.

        Also in the 80s to 90s: How about the ones(often missing a couple of limbs) who would walk around selling tissue papers while everyone often ignored them or just paid ‘cos they took pity on them(not ‘cos they feel too much compassion)? I think they usually earned less than a few bucks per day as people looked down on them as unclean, dirty and the waste of society. And in particular, as a huge nuisance. I know that many would often move to another table or pretend to be busy whenever they came over. I’m seeing a resurgent of these “tissue sellers”, btw.

        As I put together more and more of the picture(which is sickening), I think my headache’s going to get really bad. Let’s hope I don’t have to get prescribed some really strong anti-psychotic drugs like Prozac for anxiety/depression issues. =/ I’m going to stop thinking about this, man.

      • 6 francis 6 August 2010 at 02:47

        These people are simply put away quietly. You do not know how many people are suffering in that state because you cannot see it. That’s SG for you. Hiding the bad things that you see and paint you the best picture they can.

  4. 7 cy 3 August 2010 at 22:23

    domestic cost need not necessarily drive inflation,if productivity is high enough to compensate for salaries increase,rental increase,taxes,utilities increase.

    but productivity will not be high if quasi-monopolies still exist in singapore.

  5. 8 despo 3 August 2010 at 23:53

    “But what is even more puzzling is why the PAP continues to enjoy majority support at every election, if the less well-off are assumed to be the majority.”

    This statement is like asking why the Iraqis under Saddam continue to support Saddam’s regime. LOL

  6. 9 lost4ever 4 August 2010 at 06:21

    Primarily, because the government is the biggest business entity, it controls the price of everything.

    1. COE price is sky high, and its controlled by a syndicate. If introduce rules to only allow individuals to bid themselves and buy the car, price will change, clowns will bid it so high and got burnt and then it will settle and stablize, now the gambling is done by the syndicate, and we all pay.

    2. HDB price is so high, there is only one HDB with so many fat cats to feed. Over the past few years, demand and supply is out of sync, with so many additional instant headcount and so few flats being built, demand will drive up the price. There was a point in 2008, when recession hit, but HDB price was the only growth component.

    3. Rentals for small business, where it hurts the consumers most. Layers upon layers of additional costs, and the fattest cats still gets the most. A small cart stall at the Woodlands Civic Center costs more than $3000 SGD per month. How not to drive up the cost for the consumer, a stall in the food court is > than $6000.

    4. Utilities and transportation costs, your PUB bills and pump prices are high in global standards and the biggest component is probably TAX, while other countries like Malaysia has subsidies.

    5. The GLCs, these are inefficient monsters that breed and fed idiots who squander our tax payers money internationally, and at the same time compete against our SMEs for small projects.

    There are lots more to write about……

    THE PRICE of MILK POWDER has gone up > 100% over the last 5 years, while the European farmers are pouring away fresh milk in protest of low prices, SOMETHING is REALLY WRONG!!!!!!!

    Singaporeans will be extinct soon, let the FTs takeover, we are either GAY, DINK, or OMO, everything is too expensive, how dare to have babies.

  7. 11 Alan Wong 4 August 2010 at 09:52

    I seriously think by tendering out public housing land to the highest bidder and then giving our private developers a free hand to dictate the selling prices of our HDB flats, our Govt is in fact the most culpable culprit in driving the prices of our HDB flats to sky-high prices.

    Now it is reported that the highest bidder for one of our DBSS public housing schemes in Tampines will have to sell the units at minimum prices ranging from S$380K for a 3-room flat to S$670K for a 5-room unit.

    Now you tell me, how can our HDB flat be heavily subsidised in the first place, if the bidders have to resort to selling them at a certain level in order to least break even or make a profit ?

    Are our PAP Ministers not blatant liars when they still keep insisting that our HDB flats are heavily subsidised ?

  8. 12 Rain 4 August 2010 at 11:30

    In my opinion, rental and housing cost are the real culprit behind the inflation cost. Wages although they are increase (for certain people) are, in recent times, far lagging the rise in property prices.

    1. Rentals: One of the biggest contributor of inflation is upgrading. Shopping malls, new MRT lines (think Chinatown line and their subsequent impact on the neighbouring shops rental), old market places (remember Seng Siong’s acquisition of the 5 wet markets?) even housing upgradings gives the establishment reasons to increase the rentals significantly and conservancy charges besides collecting upfront payment from the residents.

    2. Housing: Needless to say, upward spiralling housing prices are a boom for the rich and the bane for the old. Recent launches of new HDB estates are selling at even higher prices compared to 2 years ago. No one really knew how much it cost for HDB to build the new flats and what is their profit margin but if there is any indication, I am not surprised if each unit of new HDB flats cost only 20% of their selling price to build and furnish (including land cost). I mean, the flats today are even smaller than similiar flats built 10 years ago! Yet, prices have doubled.

    Of course, there are many other instances of inflation that is rampant in our daily lives, electric tariffs, water bills, transportation, school fees, etc.

    Just about the only area that government is actively controlling the cost is salaries. Better, Faster, Cheaper.

  9. 13 rojakgirl 4 August 2010 at 12:02

    Hmmm… yep, more and more people seem to be frequenting Shop ‘n Save, buying via bulk or even purchasing goods online(supplements, books, electronics, etc, etc,). All of these, in order to save some money here and there.

    Hehehehe… as to why people will still continue to support a dictator, hint: fear and guilt are 2 motivators.

    • 14 rojakgirl 4 August 2010 at 14:09

      “Has our government been raising fees and charges, and pushing up land prices in the mistaken belief that these do not have much impact on inflation?”

      Btw, it’s hard for me to believe they’re pushing up the prices without any knowledge of their consequences. Then again, I have little faith in the abilities of the top hierarchies of Singapore government where many of them seem to only have paper qualifications and not the experience. When they earn big bucks and lead a cozy life, why would most of them care about the effects of their policies on the rest of the population?

  10. 15 hahaha 4 August 2010 at 14:08

    What I would really like to know is that how much of the inflation comes from our government charges such as Conservancies, GST, customs, Power & Utilities, Taxes, Public Transportation.

  11. 16 rojakgirl 4 August 2010 at 15:35

    Btw, let me add 1 more grouse. Certain services like transport and mail should not be privatised with pricing kept at a certain rate. Or if privatised, they should be open to competition(facing 2 or more companies) in order to keep prices in check.

    Let me quote 1 example: Ever since SingPost was privatised, things have gone to hell since there is only a monopoly. There are so many threads in forums about lost/stolen mail, delayed mail, mail arriving heavily damaged and so on. And they still have the guts to state that they do not lose much mail and that they’re giving out good service.

    I do know that in some particular estates(might be Punggol or Pasir Ris), the mailing service was so atrocious that many have taken to having their mails forwarded to other addresses. Why? Because it seems that at least 30%(or maybe 50%) of their mails are never delivered to mailboxes or correctly delivered.

    And all of us know that lost mails can translate into fines, higher fees, effects on insurance policies and so on. Guess that’s 1 way some people have been affected. That plus Singpost has been increasing prices and so on, so…

  12. 17 rojakgirl 4 August 2010 at 15:37

    should be “and pricing should be kept at a certain rate, affordable by the masses”.

    • 18 KiWeTO 4 August 2010 at 16:04

      A friend in France commented that since privatation, French Postal services have had increasing incidences of theft.

      Causal factors include hiring part-time labour who have no socio-emotional obligation to the postal service, paying them very low wages thus encouraging them to seek additional ‘sources’ of income, change of social respect for the postal service due to it being just another ‘private business’…

      Heresay and biased opinion, but, at the core, what kind of society do we want to live in? One where it is a race to the bottom, rich squeeze growing masses of poor (unfettered capitalistic), or one where there is, at a certain level, respect for each other as humans, and not economic digits?
      (regulated/ideological capitalistic)


      • 19 rojakgirl 5 August 2010 at 15:22

        Hmmm… I know it’s hearsay too but privatisation of mail also been happening in America and maybe even in Belgium and some other European countries. The effects are about the same: loss of respect, disenchantment and public anger/criticism. And also, of course, loss of mail, everything turns to crap, etc.

        People have to deal with higher costs as they have to pay for registered or more costly mail services. In essence: paying the mail office to not steal/lose your mail. Reminds of say, “protection fees” offered to the triad: paying them to not cause any disturbances. (What a long way the mafia/triads/gangs have gone: from being protectors of society to the wastes that cause massive problems for the law/everyone. Then again, every institution/group will eventually become corrupt.)

        I’ve no idea what unfettered capitalistic or even regulated/ideological capitalistic mean. Hmmm… will try to look those up when my headache dies down.

  13. 20 xtrocious 4 August 2010 at 15:54

    Biggest component – rental

    Can the government bring it down to control cost?

    Definitely, it is the largest landlord around…

    But is it in its interest to do so?

    That is the billion dollar question unfortunately…

    • 21 KiWeTO 4 August 2010 at 16:11

      it’s a death spiral.

      They cannot “sell” land cheaper than the previous lot, it would be a huge indicator of deflationary pressure. (not to mention a lot of unhappy bitching by those who bought at a then higher-price.)

      They could affect the rate of change of land price increases. Have it achieve a slower %increase vis-a-vis inflation. But, which scholar would attempt to do something that would make him out to be an incompetent administrator?
      (“What?! Make less money?!”)

      They created this beast called ‘inflation’, and increasing the people’s wealth through property rises. Now they have to continue feeding it until it all falls apart.

      Sounds familiar? think capitalism’s need to “Boom and bust”.

      [it is one thing for businesses using risked-capital to play in the “boom and bust” game. It is another to sucker in small time players that bet the family jewels on the same game with no loss bearing capacity. Capitalism’s game requires spreading of risk. An individual buying an expensive property at the limit of his ability to service the loan, has a ZERO spread of risk. Ahh… wealth transfers… pithy is a government that creates more wealth transfer from the poor to the rich. Thought the common economic thought was the government was primarily responsible for taking money from the rich to spread amongst the poor. Robbing Hood perhaps.]

  14. 22 Leo's Daddy 4 August 2010 at 17:49

    “In other words, the government’s failure to act effectively on inflation hurts the less well-off particularly hard.”
    – Yawningbread

    But what is even more puzzling is why the PAP continues to enjoy majority support at every election, if the less well-off are assumed to be the majority. Mat Alamak
    3 August 2010 at 21:41


    Could be due to some amount of conditioning
    based on development/progress in the past forty years (especially in visible infrastructure) with little credit
    given to the citizens/earlier generations.

    Depends on what you are measuring and
    which countries we are comparing, hence
    conditioning is suggested for the
    previous levels of support.

    Wonder if an upgraded lift is useful
    to the sad cases of suicide on a daily
    basis. One life saved from
    Suicide is another family spared
    from a disaster.

    Wanted to focus on UTILITIES (Domestic Costs) as it could afford some quick relief to many facing financial stress.

    Thought it should be cheaper to
    distribute electricity here compared to much countries with non-urban population such as Malaysia or India/China. Unless policy makers insist on making a level of profit or insist on avoiding the bad word called “subsidy”.

    Note: cannot resist the point that some people in the countries above appear to have done reasonably well with their imperfect

  15. 23 francis 5 August 2010 at 00:57

    Since the government is so kin on means testing. Why don’t we give the entire cabinet 0 salary for 6 months and we do a means testing? will they agree – Fat hope. If functions can perform if they are not there, why need them? But actually I think most functions will still be there, unless they order some drastic moves to make their involvment more credibe.

  16. 24 francis 5 August 2010 at 01:08

    Being a mentor minister also have a time frame, how long does he have to be mentor? He never specified. In all countries, non have such thing as a mentor minister, whether you can be prime minister or not, not when you are a prime minister and you need a mentor. What about senior minister, what is that jurisdictiion. Who cares for Singapore as a whole, the mentor, the senior or the Prime minister? Don’t try to blurr the lines for educated singaporeans, we are educated and we have been in this world half yours to see it.

  17. 25 Beast 5 August 2010 at 20:31

    “What he is saying therefore is that even as we manage to enjoy lower import prices through the deliberate strengthening of the Singapore dollar, this is more than wiped out by increasing domestic cost elements such as salaries, rents and payments to the government. The result is that we still continue to suffer inflation.”

    Total and utter rubbish. Wages going up? Well, maybe for some, but I still see a lot of “foreign talent” being employed on less than minimum wages. Low wage job pay is still as stagnant as ever (At my job place, the cleaners get 750 bucks a month on a 5.5 day work week).

    The way I see it, the increase in “wages” is likely due to the increase in levies on foreign workers, and this in turn may actually have a bigger impact than actual increase in wages.

    I am no economics professor, but seriously…….what is being written is not what I observe on the ground.

    • 26 rojakgirl 5 August 2010 at 20:49

      750 dollars? I know that in some places, the cleaners get employed for barely 500 dollars a month.

      Oh yah… btw, I’m not sure if this applies to all positions in Shop and Save, but I heard that the managers are employed for barely 300 SGD a month. 300 bucks for working such damn long hours. This is horrible. What are we going to see next? People slaving away for less than 100 bucks per month?

      Oh wait, there already are. Old people picking up tin cans to earn less than a few dollars per day.

      • 27 fievel 6 August 2010 at 10:48

        The cleaners at my work place (Police Station) are of two categories, part time at 500 bucks, and full timers at 750 bucks.

        Yes, Rojak girl, you probably accentuate my point that the claims of increasing paychecks attributing to inflation is a frivolous claim at best. Maybe for the rich and wealthy, but definitely not for the general masses.

      • 28 yuen 6 August 2010 at 11:40

        suppose the government gives every citizen above 65 an old age pension of say $250 a month, a married couple could ligve on the combined pension of $500 a month, and do not need to struggle for $500 a month part time jobs; the total no. of such pensioners must be less than half a million, even with an aging population, and the annual cost is just 600M, affordable in the budget

        people with no income do not benefit from economic prosperity, rising GDP, low tax, etc; there need to be some way to let them share

      • 29 yuen 6 August 2010 at 11:45

        sorry my mental arithmetic was faulty; total for .5M people is 1.5B a year, though I think it is an overestimate

  18. 30 Beast 5 August 2010 at 20:33

    Hi Alex

    I am not criticizing you, I am criticizing the economics guy who wrote that. Apologies if there is any misunderstanding. Thanks.

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