Singapore, 16 October 2017 (Monday) – Singaporeans’ One-year-Ahead median inflation expectations moderated to 2.93% in September 2017, continuing a short-term downward trend since March 2017, according to the research findings of the latest quarterly survey for the Singapore Index of Inflation Expectations (SInDEx) by the Sim Kee Boon Institute for Financial Economics (SKBI) at Singapore Management University (SMU).

The International Monetary Fund (IMF), in its World Economic Outlook report released earlier this month, raised the global economic growth forecasts for 2017 and beyond. It highlighted buoyant consumer sentiments in the major economies as a reason for this optimism. However, the report also point out that there are headwinds and fragility to the prospect of unfettered growth. The main challenges come from weaker productivity growth, persistently low inflation despite accommodative monetary policies, and significant policy uncertainty such as  increasing protectionism in many countries including some of the G3 economies (US, Eurozone and Japan). This is against the backdrop of record high stock market indices in many of the major economies including in Asia, recovering oil prices, an upswing in commodity prices and declining unemployment rates. It is therefore hardly surprising that the US Federal Reserve initiated a gradual normalisation of the monetary policy bolstered by these positive macro-economic data. Notwithstanding the optimism, commenting on the curiously persistently low inflation rate, the US Federal Reserve chairwoman Janet Yellen observed that accommodative policy might affect “…economic activity and inflation at a substantial lag.”

Globally, monetary policymakers are, as the IMF report succinctly puts, in search of “sustainable and inclusive growth.” Central banks, however, are cognizant of how global trade, finance and technology can affect unemployment and productivity growth, which in turn impact the strengths of global currencies. As a small open economy, Singapore is often adversely impacted by such policy uncertainties, particularly those that might impede multilateral trade through higher trade barriers and consequently volatile global prices.

On the domestic front, a few factors might have contributed to changes in the medium- and long-term inflation expectations. A significant decline in private road transport inflation owing mainly to lower COE premiums in the recent rounds of bidding might have more than compensated the slight increase in accommodation costs with the disbursement of Service & Conservancy Charges rebates already completed. Furthermore, there has been a substantial decline in food inflation on the back of a decline in non-cooked food item prices such as bread and cereals. Additionally, with a loosening labour market, pass-through costs like wage pressures might have also somewhat relaxed despite certain increases in administrative, energy and utility costs. Finally, the relative strength of the Singapore dollar against major currencies including the US dollar and the British pound might have kept a lid on imported inflation and consequently future expected energy prices. It appears, the net impact of these counter-balancing price pressures have resulted in an overall decline in the one-year-ahead and five-year-ahead inflation expectations of Singaporean households.

SInDEx was developed under the supervision of Assistant Professor Aurobindo Ghosh of the SMU Lee Kong Chian School of Business and partially funded by 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 the twenty-fifth wave of the SInDEx survey conducted in September 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 September 2017 survey showed that the median One-year-Ahead headline inflation (or CPI-All Item inflation) dropped to 2.93% from 3.23% recorded in June 2017. As a comparison benchmark, the mean One-year-Ahead headline inflation rate, also moved down to 3.21% in the September 2017 survey compared to 3.56% recorded in the June 2017 survey.

Compared to the historical median headline inflation expectations (since September 2011) average of 3.46%, current One-year-Ahead median headline inflation is still lower, but it is higher than the recent third quarter average of 2.78%.

Excluding accommodation and private road transportation related costs, the One-year-Ahead median Singapore core inflation expectations was recorded at 2.89% in September 2017, nearly a 0.5 drop from its June 2017 value of 3.37%. 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 also dropped significantly to 2.88% in September 2017 compared to 3.54% polled in June 2017. This subgroup’s expectations of core inflation closely resembles the Singapore Core Inflation Expectations, as unlike the general population they are not exposed to private transport or private accommodation expenses. These results indicate that there seems to be a short-term downward trend in the perception of future overall price changes representing the Singapore core inflation rate that excludes housing and private road transportation.

In summary, 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 2.90% in September 2017 from 3.27% in June 2017 survey. Furthermore, the median SInDEx1 remained lower than its historical average value of 3.46% since its inception in September 2011. SInDEx1 is constructed as an plausible alternative and more stable measure of inflation expectations by putting lower weightage on the more volatile and policy- sensitive components such as accommodation, private transportation, food and energy. Median SinDEx1 is also less adversely affected by extreme values, unlike the original mean SInDEx1.

SMU Assistant Professor of Finance Aurobindo Ghosh, who is the Principal Investigator of the SInDEx Project highlighted, “The Holy Grail for policymakers the world over seems to be the search for inclusive growth in an era of disruption and stock markets reaching record levels on a daily basis. Traditional or classical economics is also being tested, with the negative relationship between inflation and unemployment or the Phillips curve seem not to hold true anymore. In particular, the low inflation rates in the G3 economies, despite very accommodative policies, are puzzling to the Central bankers. Recent inflation expectations surveys by the New York Federal Reserve also highlighted pessimism owing to uncertainty in the implementation of the tax policies as a result of increasing acrimony within the current US Administration. All these developments might 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.”

For the longer horizon, the Five-year-Ahead median headline (CPI-All Items) inflation expectations in the September 2017 survey also pared to 3.6% from 4.01% in June 2017. The current polled number is still much less than its historical average of 4.29% since the survey started in September 2011. For the purpose of comparison, survey finding shows that the mean Five-year-Ahead headline inflation recorded 4.01% in the September 2017 survey, substantially lower  than the 4.42% recorded in June 2017 survey.

The Five-year-Ahead median Singapore core inflation rate (excluding accommodation and private road transportation related costs) dropped to 3.29% in September 2017 from 3.74% in June 2017. Overall, the composite Five-year-Ahead median Singapore Index of Inflation Expectations (median SInDEx5) corrected in September 2017 to 3.43% from 3.89% in June 2017, substantially lower than its historical median of 4.11%.

“Economists have always maintained that survey-based measures of inflation expectations might suffer from inherent cognitive or behavioral biases such as the Frequency bias or Memory bias where you recall the most frequently purchased items like food staples more rather than the less frequently purchased items which come with higher prices such as private road transportation. Richard Thaler, who received the 2017 Nobel Prize in Economics for his work on Behavioral Economics, when highlighting the record run of the stock market despite significant risk factors commented that ‘…nothing seem to spook the market...’ Having said that, the decline in the longer term inflation expectations towards the historic average of about 3% seem to be more rationally grounded or anchored.” Prof Ghosh observed.