Figure 1: One-year-Ahead-inflation expectations: The chart show the quarterly DBS-SKBI CPIEx (CPI-All Item) and DBS-SKBI CPIEx Core (Excluding accommodation and private road transportation components) One-Year-Ahead Inflation Expectations polled in the quarterly online Singapore Index of Inflation Expectations (SInDex) Survey conducted September 11-18, 2020.
Source: SKBI, SMU
SMU Assistant Professor of Finance and founding Principal Investigator of the DBS-SKBI SInDEx Project, Aurobindo Ghosh observed, “There could be a few reasons for the drop in inflation expectations besides a general increase in risk and global economic uncertainty in projections highlighted by IMF World Economic Outlook in October 2020. First, it signals a broader decline in inflation expectations that also reflects the low levels of inflation expectations that are forecasted by professional forecasters. Second, we adjusted the options for the choices to be more in line with the observed numbers so as to avoid the behavioural bias called ‘anchoring’. Finally, we see some level of divergence of groups with different levels of inflation expectations possibly due to the change of basket composition, such as a reduction in transport, recreation and clothing and footwear categories. However, component-wise indices have generally stayed put or declined slightly from the previous wave in June 2020 and shows slightly higher estimates when aggregated. In particular, respondents feel that food and healthcare inflation will have moderately positive impact due to the global pandemic.”
DBS Chief Economist and Managing Director of Group Research, Dr. Taimur Baig commented, “A general decline in inflation expectations, a common thread in high income societies in the past decade, has become even more entrenched due to the Covid crisis and associated uncertainties. Singapore, in this regard is no exception, and the latest readings from the DBS-SKBI indices are particularly revealing about the sentiment of consumers. We do however believe that with a recovery shaping up, inflation expectations will recover somewhat in the coming quarters, as they have elsewhere in advanced economies.”
For the longer horizon, the Five-year-Ahead CPIEx inflation expectations in the September 2020 survey declined to 3% compared to 3.6% in June 2020. The current polled number is significantly lower than the third quarter average of 4% since the survey’s inception in 2012 till 2019.
The Five-year-Ahead CPIEx core inflation expectations (excluding accommodation and private road transportation related costs) dropped to 2.9% in September 2020 compared to 3.7% in June 2020. Overall, the composite Five-year-Ahead SInDEx5 dropped to 2.9% in September 2020 from 3.6% in June 2020. In comparison, the second quarter average value of the composite Five-year-Ahead SInDEx5 was 4 % since the survey’s inception in 2012 till 2019.
“Longer term inflation expectations also see some corrections across the board possibly due in part to the recalibrating of options in line with published data to reduce anchoring bias. In a survey of respondents on their views of the prioritization prospects of the life vs. livelihood debate as most governments including Singapore look to cautious reopening, we find some changes since our last survey. In June 2020, 80% of the respondents opined that at least some short-term economic costs could be borne to protect vulnerable population, this figure fell to about 78% in September 2020. As a measure of the tradeoff between prioritizing economic growth compared to the cost to health, the so-called livelihood over life debate, the ratio was 3.2 in September 2020 compared to 2.3 in June 2020. This means that for every 1 person who wanted to prioritize life over livelihood, there were 3 who prioritized livelihood over life, up from 2 in the June 2020 survey. These observations might signal a higher public appetite of normalization of economic activities that governments are paying heed to globally,” Professor Ghosh observed.
Figure 2: Five-year-Ahead-Inflation Expectations in Singapore: The chart shows the quarterly DBS-SKBI CPIEx (CPI-All Item), DBS-SKBI CPIEx Core (Excluding accommodation and private road transportation components), SInDEx (Composite index with lower weights on volatile components like food, energy, accommodation and private road transportation) One-Year and Five-Year-Ahead Inflation Expectations polled online quarterly for the Singapore Index of Inflation Expectations (SInDex) Survey conducted September 11-18, 2020. The chart shows a preliminary estimate of Behaviourally Adjusted One-year-Ahead overall DBS-SKBI Adjusted CPIEx. As comparison benchmarks, the chart provides the most recent quarterly CPI-All Item Inflation, MAS Survey of Professional Forecasters median One-year-Ahead CPI-All Item or headline inflation forecasts and the yield spread of 10-year and 1-year Singapore Savings Bonds (SSB).
Source: SKBI, SMU, MAS, Department of Statistics
DBS-SKBI SInDEx survey yields CPIEx Inflation Expectations (estimating headline inflation expectations) and related indices are products of the online survey of around 500 randomly selected individuals representing a cross section of Singaporean households. The survey is led by Principal Investigator Dr. Aurobindo Ghosh, Assistant Professor of Finance (Education) at Lee Kong Chian School of Business, SMU. The online survey collection powered by Agility Research and Strategy helps researchers understand the behavior and sentiments of decision makers in Singaporean households. DBS Group Research is a co-sponsor and research partner together with the Sim Kee Boon Institute for Financial Economics (SKBI) at SMU.
The quarterly DBS-SKBI SInDEx survey has also yielded two composite indices, SInDEx1 and SInDEx5. SInDEx1 and SInDEx5 measure the 1-year inflation expectations and the 5-year inflation expectations, respectively. The sampling was done using a quota sample over gender, age and residency status to ensure representativeness of the sample. Employees in some sectors like journalism and marketing were excluded as that might have an effect on their responses to questions on consumption behavior and expectations.
The DBS-SKBI SInDEx survey was augmented in June 2018, based on a joint research study conducted by SMU researchers in collaboration with MAS and the Behavioral Insights Team, where respondents were polled about their perceptions of components of the Consumers Price Index (CPI) and adjusted for possible behavioral biases prevalent in online surveys.
Based on the recommendations of that study, the research team had, since March 2019 polled the One-year-Ahead inflation expectations of all of the major components of CPI-All Items inflation. Compared to June 2020, the September 2020 survey revealed inflation expectations have largely remained unchanged for overall and across most categories. The component-wise inflation expectations have largely stayed the same for Food, Housing and Utilities, Transportation, Education, Clothing and Footwear and Miscellaneous and dropped slightly in Healthcare, Clothing and Footwear, Household Durables, Communications and Recreation and Culture categories. Overall, in free response answers, compared to June 2020 survey, respondents in the September 2020 survey expected One-year Ahead and Five-year Ahead headline and core inflation expectations to drop.