Inflation projections – a moving target

Leong Sze Hian / Andrew Loh

With the world economy in flux, trying to project or predict inflation rates is a very difficult thing to do – as our ministers have found out.

The Singapore Government has had to revise its inflation projections several times the last one year or so. It is like trying to shoot at a moving target. Indeed, it has changed its forecasts – from one made in late 2007 and early 2008 that said inflation would ease in the second half of 2008 to one which, made in October 2008, says that inflation will ease “in the next fifteen months”.

In November 2007, the Straits Times reported the Minister for Trade and Industry, Mr Lim Hng Kiang, thus:

Trade and Industry Minister Lim Hng Kiang has said it [inflation] could rise to 5 per cent in the first quarter of next year before moderating. (Straits Times)

Mr Lim, in May, reiterated the Government’s belief that inflation would ease in the second half of 2008:

It is still our central scenario that in the second half of the year we should see an easing off of inflation pressures. (Forbes) (May 2008)

Mr Lim held to his guns in one month later, in June 2008:

Surging inflation will ease in the second half of the year despite spikes in global food and oil prices, said Trade and Industry Minister Lim Hng Kiang… (Property Market)

In July of 2008, the Finance Minister, Mr Tharman Shanmugaratnam, supported this view but with a caveat:

We also expect inflation in the second half of the year to be lower, because the effects of last July’s GST increase on inflation will wear out.  However, the recent sharp rise in global oil prices will add pressure on inflation. (Sprinter)

All well and good. Singaporeans were looking forward to an easing of the high cost of living here, not helped by the spiralling inflation rate. The Government, in January 2008, even revised its forecast and assured Singaporeans, as reported by the Straits Times:

The Government has since raised its forecast, saying prices may jump as much as 5 per cent in the early part of this year, with full-year inflation coming in between 3.5 per cent and 4.5 per cent. (Straits Times)

However, five months later in June, the Government revised its forecast again:

The Ministry of Trade and Industry (MTI) and the Monetary Authority of Singapore revised their full-year inflation forecast last week to between 5 and 6 per cent – up from an earlier estimate of between 4.5 and 5.5 per cent – citing dearer food and oil. Inflation last month hit a 26-year high of 7.5 per cent. (Property Market

In October, Minister Lim, from his earlier assurance that inflation would ease in the second half of 2008, turned cautious instead:

Inflation will be a bit sticky over the next few months. But over the next 15 months, we are confident inflation will come down. Therefore, our primary priority right now is to ensure growth. (93.8FM)

Mr Lim got some support from the Monetary Authority of Singapore in the same month (October 2008). The Straits Times in an article headlined, “Inflation to ease next year”, reported:

The MAS expects inflation next year to taper off to between 2.5 per cent and 3.5 per cent, a far cry from this year’s 6 to 7 per cent. Last month’s inflation came in at a higher-than-expected 6.7 per cent on the back of higher housing and electricity costs. (Straits Times)

In the end, what we saw was this:

The Government’s inflation rate forecasts, in the last one year, went from 3.5 and 4.5 per cent to 4.5 and 5.5 per cent to 5 and 6 per cent to 6 to 7 per cent.

And Singapore became the first Asian country to go into a recession.

Singapore‘s Prime Minister Lee Hsien Loong said on Friday the city-state had fallen into recession and the economic outlook over the next 12 months was uncertain. (October, Yahoo News)

However, the Government – again – is forecasting an easing of inflation next year. According to Minister Lim, “in the next fifteen months”. The MAS says, “next year”. PM Lee says the economic outlook “over the next 12 months is uncertain”.

But Minister Mentor Lee Kuan Yew was more upbeat and said the world economy should recover in “3 to 5” years. (938 Live).

But why are inflation forecasts important? Why forecast at all if the economy – both local and the world – is in such unpredictable mode?

I asked my TOC colleague, Leong Sze Hian. “It is important for the Government to calm people’s fears,” he explained. It will also affect how the Government designed the next national budget. For example, financial assistance schemes and wage demands all will be affected by or will depend on the inflation rate. In other words, how much help Singaporeans receive from the Government may depend on the inflation rate.  Interest rates may also be affected. “To some extent, interest rates may be generally lower with lower inflation numbers,” said Sze Hian.

Perhaps all this will be reflected in the budget next year. Already, Government ministers are assuring Singaporeans that they will take care of those in need in these bad times.


Below is Leong Sze Hian’s take on the issue of inflation:

TOC deputy Andrew Loh said to me recently:

“With the highest-paid government ministers in the world and we’re the first to enter a “technical recession”. In the first half of the year, ministers were saying that Singapore‘s inflation rate would ease in the second half. Yet, last month, the Minister for Trade and Industry said in Parliament that inflation is expected to ease “over the next fifteen months”.

So, what’s happening on the inflation front?

I refer to the article “Inflation eases for 2nd month” (ST, Sep 24).

According to the Department of Statistics’ (DOS) web site, the CPI in April, May, June, July and August was 109.8, 110.0, 109.7, 111.0 and 111.2 respectively.

As the Year-on-year (YOY) inflation for April was 7.5 per cent, this means that inflation over the last 16 months is 8.9 per cent. (August CPI 111.2 minus April CPI 109.8 plus April CPI YOY 7.5).

So, although the August CPI YOY of 6.4 per cent is lower than the 26-year highs of 7.5 per cent YOY for April, May and June, inflation has not slowed over the last 16 months.

To illustrate the above, something which cost $ 100 in April last year, would have cost $ 107.50 in April this year, and $ 108.90 last month.

For Food, which has the highest weightage of 23 per cent in the CPI, the August YOY was even higher at 8.4 per cent.

For the last 16 months, Food inflation was 11.2 per cent (August 115.3 minus April 112.6 plus April YOY 8.5).

Similarly, Food which cost $ 100 in April last year, would have cost $ 108.50 in April this year, and $ 111.20 last month.


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