Singapore, 17 July 2017 (Monday) – Singaporeans’ One-year-Ahead median inflation expectations moderated to 3.23% in June 2017, off its three year high in the March 2017 survey, according to the research findings of the latest quarterly survey for Singapore Index of Inflation Expectations (SInDEx) by the Sim Kee Boon Institute for Financial Economics (SKBI) at Singapore Management University (SMU).

There is a common perception that consumer sentiment across the globe is buoyant despite headwinds to globalisation. The world economic growth is on firmer footing, as evidenced by the normalisation of the monetary policy by the US Federal Reserve Board firmly under way with slow but deliberate increases in the benchmark interest rates on the back of stronger job growth. The European Central Bank’s announcement of not cutting interest rate any further might be construed as a baby step towards normalisation despite continuing stimulus spending through its trillion Euro bond buying activity. On the other hand, the Japanese economy is showing continued signs of recovery with wage increases finally outstripping a low but positive inflation rate. Big emerging economies like China and India are also showing signs of growth, slowly but surely overcoming structural issues like low productivity growth and rise in inequality. However, this consumer optimism of the nascent growth is clouded by political and policy uncertainties surrounding the new US administration, negotiations by post-BREXIT UK government and rise of protectionism in election results elsewhere in the European Union.

It is against this backdrop that the World Bank group, in its Global Economic Prospects report released in June 2017, highlighted the perceived real risk to multilateral trade and inward-looking policies by calling the current state of the global economy a ‘fragile recovery’, despite a  raised growth forecast of 2.9% (from 2.7% in 2017)  for 2018-2019. As a small open economy, Singapore is susceptible to the vagaries of such policy uncertainties, particularly those that might impede multilateral trade through higher trade barriers and increased global prices.

Domestically, a few factors presented counterbalancing forces on prices. On one hand, with a loosening labour market the wage pressures have subsided somewhat. The demand for accommodation, a significant component of household budget, has continued to be weak as a result of additional housing supply coming on board, thereby keeping a persistent downward pressure on rental prices. In addition, other factors such as Service & Conservancy Charges rebates, might have also put downward pressure on overall price levels. Notwithstanding such downward pressures, another significant component of the headline inflation, private road transportation costs, have gone up slightly. The upward price pressure also came from increased prices of energy, water and some administrative costs (such as increased parking fees) which have had a knock-on effect on prices. It appears, the net impact of these opposing price pressures have resulted in an overall decline in the inflation expectations of Singaporean households.

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 Singaporean households. The online survey helps researchers understand the behaviour and sentiments of decision makers in Singaporean 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-fourth wave of the SInDEx survey conducted in June 2017, consumers shared their views on expectations of inflation-related and asset management related variables over the medium term (One-year-Ahead) to long term (Five-year-Ahead).

The results of the June 2017 survey showed that the median One-year-Ahead headline inflation (or CPI-All Item inflation) pared to 3.23% from 3.38% recorded in March 2017. As a comparison benchmark, the mean One-year-Ahead headline inflation rate, also moved down to 3.56% in the June 2017 survey compared to 3.86% in its March 2017 survey.

Compared to the historical median headline inflation expectations (since September 2011) average of 3.48%, current One-year-Ahead median headline inflation is still lower but it is higher than recent second quarter average of 2.93%.

Excluding accommodation and private road transportation related costs, the One-year-Ahead median Singapore core inflation expectations was recorded at 3.37% in June 2017, unchanged from the March 2017 survey. 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 inched up to 3.54% in June 2017 compared to 3.53% polled in March 2017. 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 some stability in the perception of future price changes in the Singapore core inflation rate which excludes housing and private road transportation.

Consequently, the One-year-Ahead median Singapore Index of Inflation Expectations (Median SInDEx1), a composite weighted index of One-year-Ahead median inflation expectations, also moderated to 3.27% in June 2017 from 3.38% in March 2017 survey. Despite the fluctuation, median SInDEx1 remained lower than its historical average value of 3.49% 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, “The surge in consumer and investor confidence since the current US administration’s promise of tax cuts and infrastructure spending, which manifested in record breaking runs in stocks markets around the world, have abated somewhat. Policy uncertainty and anti-globalisation rhetoric surrounding the new US administration and impending BREXIT negotiations might have reined in the euphoria to some extent. All these developments have kept the US dollar slightly depressed against major global currencies including the Singapore dollar, despite a continuing neutral stance on the Singapore dollar by the Monetary Authority of Singapore. Furthermore, moderate appreciation of other local and regional currencies have kept a lid on imported inflation despite higher energy and cyclical increase in commodity prices.”

For the longer horizon, the Five-year-Ahead median headline (CPI-All Items) inflation expectations in the June 2017 survey also corrected downwards to 4.01% from 4.09% in March 2017. The current polled number is still much less than its historical average of 4.32% since the survey started in September 2011. For the purpose of comparison, survey finding shows that the mean Five-year-Ahead headline inflation recorded 4.42% in the June 2017 survey, inching downwards from 4.6% recorded in March 2017 survey.

The Five-year-Ahead median Singapore core inflation rate (excluding accommodation and private road transportation related costs) was unchanged at 3.74% as compared with survey polled in March 2017. Overall, the composite Five-year-Ahead median Singapore Index of Inflation Expectations (median SInDEx5) in June 2017 stayed almost flat at 3.90% from 3.89%% in March 2017, though still less than its historical median of 4.14%.

“Inflation Expectations measures based on SInDEx surveys do not try to replicate the official inflation numbers released by Monetary Authority of Singapore and the Ministry of Trade and Industry. One major difference is that we do not ask for individual components of the basket of goods and services based on the household expenditures surveys. SInDEx surveys focuses on the consumer perception of inflation in the medium and long term by using information available to them, including official releases and their own personal experience. As a caveat, survey based measures often shows some systematic biases owing mainly to low frequency of purchase of big ticket items such as accommodation or private road transportation. They are also inordinately affected by change of prices of more frequently purchased items such as food staples, though they form a small fraction of the representative household consumption basket. We address such biases through better designed questionnaires and quantitative bias correction methods. We do observe from the June 2017 SInDEx survey that Singapore’s core inflation expectations seem to be flat or decrease at a lower rate than the CPI All-Items or overall inflation expectations. This is qualitatively consistent with the One-year expectations of the MAS Survey of Professional Forecasters,” Dr. Ghosh observed.

For more information, please contact

Teo Chang Ching (Mr)

Senior Assistant Director

Corporate Communications

DID: 6828 0451

Email: ccteo [at] smu.edu.sg