8 Sept 2007 9:08:00 am

econs.

WHAT is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man?
Inflation.

That is, at least according to the late United States president Ronald Reagan on whom, incidentally, an assassination attempt was made.

Seventy days into his presidency, a gunman shot and wounded him.

But another assassin was lying in wait. Inflation stood at an alarming high of 11.83 per cent in 1981 - the year Mr Reagan entered office.

However, just as he overcame his gun injury, he subdued the inflation rate to below 4 per cent.

Two weeks ago, going by Mr Reagan's definition, Singapore took a small punch or two.

It was announced that inflation had hit 2.6 per cent compared to a year ago, Singapore's highest in 12 years.

So far, the reaction has been muted.

It is a sharp contrast to the 1990s when the inflation rate went up from 1.5 per cent in 1988 to 3.4 per cent in 1991.

Union leader Victor Pang recalls emotional workers then complaining about the rising cost of living. 'It was really tense. Workers were very concerned and saying, with inflation, how are we going to cope?'

It even led to suspicions that the Government's inflation figures under-estimated cost increases. A Cost Review Committee (CRC) was set up in September 1992 - a move that then-prime minister Goh Chok Tong announced during the National Day Rally that year.

Today, Singapore's latest inflation rate remains remarkably low by international standards. But given the record of devastation that severe inflation has chalked up around the world in the past, it's no wonder economists as well as politicians keep a close eye on it.

SO, WHAT'S INFLATION?

'INFLATION is when you pay $15 for the $10 haircut you used to get for $5 when you had hair,' quips humour writer Sam Ewing.
Housewife Ng Guan Chee, 57, has not heard of him, but shares his sentiment.

A year ago, a tin of milk powder cost her family $11 plus. Today, it is $14 plus.

Kai lan (Chinese kale) cost $3 plus per kg then. Today, expect to pay $4 to $5.

'Utility bills are also up from $80 plus to $90 plus. Bus fares too,' she says.

Put simply, inflation refers to a rise in the average level of consumer prices.

How is it measured? Most economies, including Singapore, do so by tracking the Consumer Price Index (CPI) .

The CPI, compiled monthly by the Department of Statistics by scouring shops to jot down prices, is based on what an average household consumes.

For practical reasons, it does not measure the cost of all the items in the economy but that of a fixed basket of goods and services bought by most households.

All in, there are 5,170 varieties, in seven categories: food, clothing and footwear, housing, transport and communication, education and stationery, health care, recreation and others like holidays, alcoholic drinks and tobacco.

Every five years, it is updated. Today's basket is based on the 2002/2003 Household Expenditure Survey.

A perennial question is whether the CPI fully captures rising costs.

MP Liang Eng Hwa asked about it last week in Parliament, but opposition MPs Chiam See Tong and Low Thia Khiang had raised it in 1993 and had suggested an alternative index on cost of living.

Then-trade and industry minister S. Dhanabalan defended the CPI, saying no nation had a cost of living index. His current-day counterpart Mr Lim Hng Kiang said it reflects the spending patterns of the population's different segments.

Although the CPI is a widely accepted measure, it is not without its flaws.

It does not capture, say, changes in the quality of goods and services which have occurred for various reasons, including a result of the increase in the goods and services tax (GST).

Says economist Toh Mun Heng: 'The fishball noodles that used to have six fishballs may now have five at no change in the price. The quality change is not tracked.'

So effective inflation may differ from CPI figures, but no yardstick is foolproof. 'Even if the CPI is second best, it's still the best,' he says.


WHY DID PRICES GO UP?



WHAT is causing today's inflation can be divided into internal and external factors.

In the first camp: A fast-trotting economy.

The rise in inflation is not surprising given the four years of strong economic growth, said MTI Minister Lim Hng Kiang.

'We have been enjoying practically 16 quarters of growth... in fact, I'm surprised our inflation numbers are as low as they are.'

It is a question of demand and supply.

When the economy grows, demand for goods and services goes up. There may not be enough supply to meet this demand, and so people with money will bid up the prices of the things they want, says Prof Toh.

This is the reason housing rents, one of the components making up the CPI, are rising. As more and more apartments are sold en bloc, there are fewer and fewer units available islandwide for lease.

Traditional textbook theory says inflation could also be caused by central banks inflating money supply - for example by printing more money.

But this is not the case here, says economist Tan Khee Giap. 'I don't think the Monetary Authority of Singapore targets money supply. MAS does not manipulate our exchange rate either, although it does 'smooth' volatility but not change the direction of the movements.'

Government policies play a role too.

For instance, the recent GST hike to 7 per cent has, as economist Tilak Abeysinghe says, led to a permanent two-point increase in prices.

Public transport operators SBS Transit and SMRT Corp have also applied for fare increases. If approved, bus and train fares will rise by up to 1.8 per cent - or around three cents - from next month.

Singapore is also exposed to external factors.

Prices of international dairy products, for instance, spiked up by 46 per cent between last November and this April.

The reason: drought in Australia, a major milk exporter, and an increasing appetite for milk in countries such as China.

Other external factors range from higher crude oil prices, raising electricity tariffs and petrol prices in turn, to Indonesia's move in May to raise the minimum wages for its workers in Singapore.

However, some argue that globalisation has had a salutary effect on inflation.

For instance, while the Chinese population may be guzzling milk and driving up prices, they too are manufacturing products at ever cheaper prices - from OceanStar DVD players to Chery cars.

Indeed, it is due to globalisation that, for a long time, inflation has not been an issue for most of the developed world, despite conventional wisdom that rapid economic growth can be inflationary.


WHO'S AFFECTED?

THE other side of the globalisation coin, however, is not pretty.
Lowest-income Singaporeans have consistently been hardest hit by inflation.

In 2004, those in the lowest 20 per cent income bracket saw an inflation rate of 2.3 per cent. Compare this to 0.3 per cent for richer households in the top 20 per cent, and 1.5 per cent for those in the middle bracket.

In the first half of this year, the inflation rate for the poor fell to 1.1 per cent, but it is still higher than the 0.7 per cent for the higher-income.

Why? Essentials such as food and public transport cost more and form a larger part of the poor's expenditure, says economist Hoon Hian Teck.

The poor spend relatively more on food (29.6 per cent) compared to the rich (17 per cent). 'The rise in the price of food thus had a greater impact on the CPI for the lowest quintile,' he says.

Their stagnating incomes exacerbate the situation. Says union leader Victor Pang: 'Look at the cleaners. In the 1990s, they were earning $600 to $800.

'Today, they earn the same, while everyone else's salaries are moving up.'

Thus, the poor are doubly squeezed: depressed wages and yet higher costs.

Cleaner Mani Joseph, 55, feels it. His pay has remained at $700, but he spends more on bus fares, milk and rental. 'My spending is tight and I'm fed up,' he says.

So what can be done?

HDB can keep rentals for neighbourhood shops affordable, even as rentals elsewhere move up, suggests Mr Liang. 'This will allow competition among retailers and give the residents a choice besides the megamarts.'

He and the other ruling party MPs also maintain that the impact has been offset by government handouts.

Says MP Matthias Yao: 'If we net off the subsidies, rebates, offsets and Workfare bonuses from the price increases, I think the lower-income groups are not so much worse off compared to the higher income households.'

A better long-term solution, says academic Gillian Koh, is for the Government to 'redouble its efforts to help those in the lower-wage level find jobs that pay better'.

Allowing the Singapore dollar to appreciate more and keeping domestic cost pressures down will also help in lowering imported inflation and the cost of non-traded goods and services, says economist Tilak. Rentals and other fees should also be reassessed.

Another group being penalised are savers, says economist Chua Hak Bin. 'Bank deposit rates - typically below 1 per cent - have not risen despite higher inflation rates. That implies that bank deposits face negative interest rates as inflation is higher than deposit rates.

'The purchasing power of savings is being eroded.'

Stocks and property are thus better hedges against inflation, but volatile market conditions may dissuade savers from investing money in risky assets, he adds.

ANY POLITICAL IMPACT?

HIGH inflation exacts a political price. It induces this worry: Will salaries and savings keep pace with rising prices?
If uncontrolled, high inflation saps people's confidence in their future and their leaders.

While Singapore in the 1990s was not experiencing runaway inflation, cost of living did become the subject of a protracted and politicised debate.

The CRC was convened in 1992 and then reconvened in 1996 to examine the issue, when niggling worries about it simply would not go away.

Opposition parties jumped into the fray, alleging that the rise in the cost of living was 'no less than phenomenal'.

Singapore was seeing sharp hikes in hospital charges, bus fares and university fees by 25 per cent to 30 per cent then, and in quick succession, recalls MP Matthias Yao. HDB flat prices had also risen substantially in the preceding years.

'The public found the big increases difficult to absorb in one go,' he says.

In his 1992 National Day Rally, Mr Goh Chok Tong warned that a preoccupation with such issues could distract Singaporeans from the country's goal of creating economic growth by competing well in the world economy.

Today, is the 2.6 per cent inflation rate a harbinger of the debate of the 1990s?

The answer appears to be no.

For one, the tenor of governance has shifted in the past two decades. Today, it has become savvier at soft-selling unpopular policies.

'The PAP learnt from what happened in the 1990s,' says Mr Pang, who had sat on the CRC. 'The current authorities do it in a very diplomatic way. Before the GST hike, PM Lee Hsien Loong and his Cabinet have gone around explaining it.'

The Government had also openly acknowledged the income divide and the need to address the problems of the poor, adds Dr Koh.

'Excellent PR job in the past 12 months' was how economist Chia Siow Yue, who also sat on the CRC, puts it.

For another, those directly affected this time are less adept at articulating their discontent.

The general climate of a better economy with wage increases for most workers and an upbeat mood also mitigates against any feelings of being squeezed.

Prof Chia says: 'In the 1990s, it was a question of basic affordability of life.

'Today, it is a question of envy, of the rich getting richer while the rest of us are not. But most of us are still doing OK. Unemployment is low and the prospects are bright.'

Indeed, a recent salary survey by HR consulting firm Mercer forecasted that salaries will rise by at least 4.3 per cent this year, up from 3.9 per cent last year.

MPs such as Mr Liang also would like to believe that a more educated population is less liable to blame the Government.

'Though they still lament the increase in prices, many also understand that some are beyond our control,' he says.

Indications are that inflation will still likely rise within the year.

Economist Chua Hak Bin notes that the sharp rise in residential rents is not fully reflected in the accommodation part of the CPI.

Also, companies such as FairPrice are absorbing the GST hike till later in the year. 'The GST pass-through to inflation is thus not over.'

Add to that the likelihood of higher transport fares, and inflation could even breach the 3 per cent level before year end, he predicts.

Whatever the figure will be, inflation is, as Mr Yao says, 'always politically sensitive and remains of great concern to the public'.