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Should we worry about inflation?

Recently there has been much concern over rising inflation in Singapore. Looking at the Consumer Price Index (CPI) the average figure for the year 2009-2010 was 2.8% (shown in blue). More alarming the CPI figure in December 2010 was up by 4.6% (shown in red) from December 2009. So inflation is clearly rising and furthermore the rate is accelerating. How much should you be concerned and is inflation the biggest problem we are facing in our economy?

Housing, transport and food were the main contributors to the rise in CPI. As they form a larger proportion of household expenditure for those on median incomes and below, the true rate of inflation for these income groups is much higher. As always the effects will be magnified even more for the bottom 20% of the income distribution. What really matters therefore is where you are on the income distribution.

The government line would be that this was beyond their control. They will say that inflation has been rampant  everywhere in Asia and particularly in China and India (at least 5% and 10%p.a. respectively). No doubt the incumbents will blame poor harvests and extreme weather for the surge in food costs coupled with the leap in oil prices back above US$100 that has occurred as the world economy recovers.

However as usual this is to only tell half the story. That is why we must re-examine the contents of our rice bowl. Is it the surging economies of China, India and the rest of Asia cracking the porcelain of your bowl? Or is it domestic inflation caused by policy decisions of our own government? It is relatively simple to measure the contribution of external factors to inflation by looking at the index of import prices. Last year the Singapore dollar rose by 9% against the US$ (shown in red). This meant imports priced in US$ became cheaper when converted to S$. As a result the import price index in 2010 was up only 0.7% compared with 2009 (shown in blue). You need no further demonstration that it is in fact domestic factors which have played the major role in inflation. Further supporting this, in 2009, the import price index fell by 8% yet the CPI was still positive.

Therefore most of our inflation is being generated domestically.

In Singapore this government’s policies have allowed companies to bring in a virtually limitless supply of cheap labour from the rest of Asia thus ensuring that there is continuous downward pressure on real wages. This, together with low corporate taxes and generous subsidies for new foreign investment has been a recipe for rapid growth. However productivity growth over the last fifteen years has not kept pace. In fact it can only be described as abysmal.

In 1994 Paul Krugman, the Nobel Prize laureate, pointed out that there was little qualitative difference between the Singapore model and the Stalinist one of the 1930s Soviet Union and predicted that as Singapore ran out of labour inputs ( declining birth trend) its growth rate would fall sharply.

Our government mistakenly thought that had found an escape route from this trap. By opening the floodgates to foreign labour while having no floor on wages, it seems they thought the economy could grow indefinitely. At the same time Singapore’s population could expand without limit. In fact MM Lee recently came out to warn us all that if we wanted slower population growth through immigration we would have to accept lower GDP growth rates. Clearly the only solution the incumbents have for producing GDP growth is by increasing the importation of labour through immigration.

The result has been a big fall in the proportion of GDP going to wages and relentless upward pressure on the factor of production in (virtually) inelastic supply, namely land. This has suited the government just fine as it owns nearly 80% of the land and thus benefits from the rise in land prices.

Of course rising food prices globally play a big part in the rise in food costs locally. But the competition for land is undoubtedly playing a significant role in the rising cost of meals at food courts, hawker centres, supermarkets and wet markets as rents rise. I hear these complaints from stall holders continuously as I go about my walkabouts several times a week.

Another domestic factor contributing to rising inflation is government and GLC policies that favour the creation of  oligopolies such as integrated food court operators. Make no mistake! GLCs are not in the private sector, they have virtual monopolies and no real competition to their power to pass on costs by putting up prices. The government’s ownership of most of the transport system, from the MRT to taxis, and the lack of an effective regulator, also means that the transport companies have been able to more than pass on the rise in energy costs stemming from higher oil prices. The result is further pressure on your wallet.

Here’s one for the students of economic history. Back in 1926 before he published his general theory, Keynes warned against a type of inflation that transfers income from workers to profits. Are we seeing that inflation here and now? The economy is overheating but the benefits are going to profits and not to working Singaporeans.

Certainly we can see this effect in the CPI index. The HDB resale price index has risen some 340% in the last twenty years while median nominal household income has risen by only just over 100%. Even though The Department of Statistics uses an archaic method of calculating housing costs the effects are still apparent.

With such an elastic supply of foreign labour it is no surprise that average nominal incomes have lagged behind inflation over the last three years and median real household incomes have essentially remained unchanged for nearly thirteen years. And despite years of strong economic growth consumption has fallen to just over 40% of GDP.

The incumbents will try to divert you with a bit of hype about fertility rates. (The downward trend in birth rates is for another article.) But this is merely an attempt to shift the blame on to you for not having enough babies so that our minsters to continue to support the current immigration policy.

Don’t let them scare you with those simple GDP figures either. I had already dispensed with that bogey in my previous articles. What we need from our GDP is quality not quantity. We need policies that achieve economic growth by raising the productivity of our inputs (workers) and not by just increasing the inputs themselves (importing foreign workers).

The lack of a raise in real median incomes, our appalling productivity figures and the strain on scarce resources like land should be more of a worry to you than inflation. Only by shifting focus and reducing the strain are we likely to get a slow-down in inflation accompanied by rising real wages. Your rice bowl will be all the happier for it.


  1. In any country, the cause of inflation is synonymous with the printing of money. Since the Sing dollar is rising against other currencies, then it indicates the extent to which the Singapore government is printing money.

    For example, if we assume the Singapore GDP to be 200 billion, and an inflation of 5%, then then they have printed at least 10 billion dollars (5% of the GDP). And keep in mind, this figure does not account the appreciation of the Sing dollar. So actually, the Singapore government has printed more than 10 billion.

    Assuming we have 2 million Singapore citizens (I don’t know what this figure is) working and paying taxes, that is $5000 for each citizen that has been “billed” to them [10 billion/2 million].

    Do we know how they using this money?


  2. During 1982 to 84, I worked for KFC as a part time waiter earning 4 dollars an hour and my niece currently working as awaiter earns only 5 dollars an hour in one of the food establishment in town. I just can’t belived it , how the wage has moved after more than 25 years down the road for waiters and low skill jobs.


  3. KJ,
    Thanks for your excellent review. I am visiting your website regularly to keep abreast with reality. I used to be “pro-government” but NOT ANYMORE! I know ground frustration is growing based on many people I spoke to. We rea paying more just to survive and not to mention struggling to find space in our daily lives with more foreigners crowding our infrastructure. I say, enough is enough. KJ, I hope Reform stand in Bedok – cause you’ll get my vote 100%.


  4. KJ, I am in total concurrence with much of what you say. One thing I would like to caution about is the government’s recent gesture at concessions to its citizens. Let us not be hoodwinked. They, the government, are offering carrots & candies because it is election season. They promised us they are slowing down the huge influx of foreign workers who are basically stealing away our (the citizen’s) jobs and our flats/houses, cars, schools, cheap meals, etc. These hordes of foreigners especially the better off expatriate executives are congesting our trains, our roads & expressways, our parking spaces, our cafes/restaurants, etc. I don’t see an end in sight. The government’s promises are, like the promises they always make in election years in the past, deceptive and short-lived. Just watch out after the election is over. A year or two after that they will be back at their antics to the chagrin of native citizens. To put a stop to such deception we must bring the message across that we will not be fooled by sugar-coated promises that are short-lived and manipulative. We must tell them we want only honest, lasting, effective administration that cater to the bigger interest of native citizens – not to exploitative foreigners who come here because our country is a gold-mine for them.
    KJ, keep on soldiering to give us, the common man, another voice to be heard in Parliament. We need alternative views like yours to balance the nonsense from the government.


  5. employment rate looking good, GDP on the high and everyone look like they have got spare cash to spend. strengthening the local currency is technically a logical move in today’s recovery period and the “gradual increase” indicates the MAS is careful not to repel investors away.

    but when employment rate is sustained by the influx of foreigners, and salaries are still depressed, and GDP is supported by artificial pumping using public funds and is controversially a rebound instead of real growth, the further strengthening of the currency spells more like a doomed monetary policy.

    the PAP afterall is not stupid and they know currency strengthening can only be a temporary move to counter inflation. a temporary move to ease Singaporeans’ sufferings for the year of Election.

    Post-election 2012 will be like 2007 – more waves of immigrants, higher inflation especially in housing costs and food prices, 10% GST,, Ministerial Salaries Pay Raise, and not forgetting a higher GDP(who does it matters anyway).

    read the following article to find out more:

    “THE Monetary Authority of Singapore (MAS) surprised markets on Thursday by allowing the rising Singapore dollar to strengthen further, bucking a worldwide trend of countries resisting currency gains.

    Citing concerns over inflation, the central bank set the Singdollar on a steeper appreciating path. It also gave the currency more room to fluctuate, in view of the unusual volatility in international currency markets.

    The move runs counter to that of other central banks – which have been trying to boost competitiveness by capping the rises in their own currencies – and caused a flurry of activity in global markets.

    The Singdollar soared as high as $1.289 against the greenback before settling down at about $1.294, a new record. With the Singdollar higher, other currencies had more room to rise as well.”


  6. The second-wing policy came a cropper in Suzhou and after that, the government lost much of its appetite for overseas adventures.


  7. Some Coffeeshops have already increased drink prices eg. a glass of plain ice water (Ice kosong) used to cost 30 cents, now it has increased to 40 cents. A can of eg.Coke Light used to cost S$1.20 at most, now many coffeeshops charge from S$1.30 to S$1.50. These are only examples of recent increases in prices of consumer items. Things are getting more expensive.


  8. Thanks KJ for your straight to the point assessment. Mr Paul Krugman’s own perceptive assessment was not taken into account by a political party motivated by capitalistic self-agenda CEOs and a whole (un)civil service of yes-men. An Elastic supply of foreign labour/ppl is merely evading the issues at hand: our very SURVIVAL as a people who grew up together is at critical stake now.~>KJ, I’d love to see our patronised monarchs fall off their chairs in parliament if you manage to show this to the public at large 🙂 I can almost picture DrGohKengSwee Slapping the back of LKY’s head for allowing reality to deterioriate to our current state of affairs. Good Summ KJ.


  9. KJ, you have many valid points. Although our parents, the baby-boomers, do not have the benefit of new media but which parent doesn’t do a double take and NOTICE when their children – us – remind what’s going on. But don’t fret. Currently, public sentiments are negative because of the sheer negative quality of living we’ve had for so long, with no seeming end in sight except to VOTE out of it. The only spilinter in our feet to move ahead are currently, unfortunately, the new “citizens” from abroad who’ve “bought” the Singaporean product and are making our Living Room, their Restrooms. The onus is on our OVERCOMING this unethical tactic from the Profits action party, which calls for UNITY on our part. I’ve spoken to my parents AND THEY UNDERSTAND THE INFLATION AS WHAT THEY FEEL & ACKNOWLEDGE THE SPURS PUNCHED INTO ALL OUR HIDES AS CITIZENS. The key is to spread the word to do as much as we can, for REFORM.


  10. KJ, remeber about 15 years back, LKY proposed the second wing policy? I am a fan of that. In fact, it is a very visionary and good policy. Somehow, they discarded it for reasons unknown. If the second wing policy had just been acted upon and made successful, Singaporeans will be working the world over. Rent pressures on a limited land resource will not be a critical concern as it is now.

    Somehow, somewhere along the line, the pro-Singaporean policy became a rent seeking Singapore policy.


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