Singapore, 16 January 2017 (Monday) – Singaporeans’ One-year-Ahead median inflation expectations inched up to 2.7% from its lowest level since September 2011, according to the research findings of the latest quarterly survey for Singapore Index of Inflation Expectations (SInDEx) by Sim Kee Boon Institute for Financial Economics (SKBI) at Singapore Management University (SMU).

In the December 2016 meeting of the Federal Open Market Committee (FOMC), the Federal Reserve Board unanimously decided to increase the benchmark interest rate by 25 basis points to just below 0.75. The US central bank also signaled an accommodative stance and gradual growth in interest rate in keeping with its dual mandate of maximum employment and price stability even though both market-based and survey-based measures indicated inflation is below its long term target of 2%. However, there are several headwinds for unfettered global growth. First, despite improving conditions, there are significant global policy uncertainty and risk to global trade including ongoing fear of a “hard landing” on BREXIT negotiations and its impact on the future of Eurozone including upcoming elections and referenda. Second, somewhat unknown foreign policy stance of the incoming US administration. These policy uncertainties and populist trends precipitate an increasing likelihood of multi-lateral trade pacts like the Trans Pacific Partnership (TPP) might take a backseat to possibly bilateral partnerships. There are some silver linings, such as the purported reduction of  US corporate taxes by the Trump administration which might usher in a period of increased growth in the US and consequently elsewhere in the world.

On the domestic front, in its October policy announcements the Monetary Authority of Singapore (MAS) adhered to its neutral stance on monetary policy with zero percent appreciation of the Singapore dollar against a trade weighted basket of currency, continuing its policy since April 2016. There were mainly two sources of price pressures domestically. First, stabilizing pound sterling and slowly appreciating US dollar had an impact on the trade weighted Singapore dollar exchange rate. Improving US demand and consequent increase in oil and commodity prices meant that there was some though moderate risk from imported inflation. In Singapore, this might potentially have an uplifting effect on prices particularly on the Singapore core inflation (which excludes accommodation and private road transportation expenses). Second, with a slight increase in accommodation expenses, more or less unchanged private road transportation costs and slackening in tightness of labor market conditions, pass-through costs for consumers were slightly higher as well. There has been dissipation of the effects of one–time budgetary concessions that affected inflation in the last few quarters. These implied possible but muted increase in the headline inflation rate.

The SInDEx was co-developed by Assistant Professor Aurobindo Ghosh of the SMU Lee Kong Chian School of Business with funding from the SMU Sim Kee Boon Institute for Financial Economics. The SInDEx survey, supported and implemented by Agility Research & Strategy, a leading Asian consumer insights and strategy firm with a large client base of Government and Private sector clients, is derived from an online survey of around 500 randomly selected individuals representing a cross section of Singapore households.. The online survey helps researchers understand the behaviour and sentiments of decision makers in Singapore households. The quarterly SInDEx survey has yielded two composite indices, median SInDEx1 and median SInDEx5. Medians are less affected by outliers in survey-based methods, hence median SInDEx is used for the current release.

In the latest and twenty-second wave of the SInDEx survey conducted in December 2016, consumers shared their views on expectations of inflation-related variables over the medium term (One-year-Ahead) to long term (Five-year-Ahead).

The results of the December 2016 survey showed that compared to September 2016, the median One-year-Ahead headline inflation (or CPI-All Item inflation) inched up to 2.7% compared to its five-year low of 2.63% recorded in September 2016. As a comparison benchmark, the mean One-year-Ahead headline inflation rate, also moved up to 2.95% in the December 2016 survey compared to its five-year low of 2.82% in the September 2016 survey, continuing its sub 3% value since December 2015.

Compared to the historical median headline inflation expectations (since September 2011) average of 3.5% and the more recent fourth quarter average of 2.72%, the current One-year-Ahead median headline inflation is still lower. Weakness in global growth exacerbated by the political and policy uncertainty particularly surrounding global trade in the US and Eurozone might have prompted representative Singaporean households surveyed to believe that One-year-ahead expected overall price changes might be inching up.

In tandem with the overall headline inflation, the One-year-Ahead median Singapore core inflation expectations (excluding accommodation and private road transportation related costs) saw a significant jump to 2.82% from its lowest ever recorded average of 2.47% in September 2016 since the survey’s inception in September 2011. More significantly, for a subgroup of the population who own their accommodation and use public transport, the One-year-Ahead median Singapore core inflation rate for the subgroup increased to 2.65% from its record low of 2.3% polled in September 2016. This subgroup’s expectations of inflation closely tracks the Singapore Core Inflation Expectations, as they are not exposed to private transport or private accommodation expenses. These results indicate that there has been a substantial increase in the perception of future price changes in the Singapore core inflation rate which excludes housing and private road transportation. This might be attributed to both domestic and global price pressures and expected increase in oil and commodity prices.

In sum, the One-year-Ahead median Singapore Index of Inflation Expectations (Median SInDEx1), a composite weighted index of One-year-Ahead median inflation expectations, inched up to 2.73% in December 2016 after touching its five-year record low level of 2.54% in September 2016 survey. Despite the increase, median SInDEx1 remained substantially lower than its historical average value of 3.5% since its inception in September 2011. SInDEx1 is constructed as an alternative and more stable measure of inflation expectations by putting lower weightage on the more volatile and policy- sensitive components like accommodation, private transportation, food and energy. Median SinDEx1 is less adversely affected by outliers, unlike the original mean SInDEx1.

SMU Assistant Professor of Finance Aurobindo Ghosh, who is the Principal Investigator of the SInDEx Project highlighted, “I think there are two main challenges that are facing the global economy despite unmistakable signs of recovery. First, it is policy uncertainty rather than political uncertainty. Even though the markets have recovered somewhat from the fallout of the BREXIT referendum and nearly euphoric rise in consumer confidence levels despite the largely unexpected US presidential election outcome riding largely on corporate tax cut promises, the market exuberance belie the trepidations of the uncertain and largely untested future. Second, geopolitically we can see the BREXIT vote and the results of the US presidential election as indicators of a protectionist, populist and possibly anti-trade fervour. Global growth is at a cross roads, with the nascent growth in the US seemingly a beacon of better days ahead. Any protectionist mindset might translate to a loss of opportunity of the stimulus spending and consequent continuation of the aftermath of the global financial crisis. Against this backdrop, it is to be expected that for the consumers of a trade dependent economy like Singapore would prepare for possible increase in overall price levels.”

For the longer horizon, the Five-year-Ahead median headline (CPI-All Items) inflation expectations in the December 2016 survey inched up to 3.5% (from 3.43% in September 2016), thus moving up from its lowest recorded level since the survey’s inception in September 2011. For the purpose of comparison, survey finding shows that the mean Five-year-Ahead headline inflation recorded 3.9% in the December 2016 survey, moderately increased from 3.75% recorded in September 2016 survey.

The Five-year-Ahead median Singapore core inflation rate (excluding accommodation and private road transportation related costs) significantly increased to 3.36% in December 2016 from 3.13% in September 2016. In the light of these findings, the composite Five-year-Ahead median Singapore Index of Inflation Expectations (median SInDEx5) in December 2016 also inched up to 3.4% from 3.28% in September 2016 which was the lowest median SInDEx5 score over the last five years. The long term inflation expectations of Singapore Core inflation (without accommodation and private road transportation) seems to be better anchored and significantly lower than the historical average median SInDEx5 of 4.17% since September 2011.

"Central banks like the US Federal Reserve often make monetary policy decisions about an uncertain future based on a dashboard of measures of inflation expectations which could be market-based, such as the Treasury Inflation Protected Securities (TIPS), and survey-based like the Survey of Professional Forecasters (SPF). From the SInDEx survey on representative Singaporean households, we find that the inflation expectations are inching up as a reaction to longer term global and domestic conditions. While being fairly reliable, it is well-known that inflation expectations surveys like the SInDEx better capture changes of expectations of inflation than the true value of inflation expectations.” Prof Ghosh added.

Amrita Banta, Managing Director of Agility Research & Strategy, the survey partner for a number of years for the SInDEx Survey stated, “The importance of quality of methodology and interview responses, as well as the robustness of the data, are key to ensuring that thorough analysis by SMU researchers derive insightful findings year after year. This is the cornerstone to our working with SMU on this important survey. We as a business constantly measure the pulse of the Asian consumer, and the impact of economic inflation on consumer choice is a key factor for brands to take account of in their marketing strategy.”

For more information, please contact

Teo Chang Ching (Mr)

Senior Assistant Director

Corporate Communications

DID: 6828 0451

Email: ccteo [at] smu.edu.sg