Inflation!

Hi 6K + Ms How!

Finally gotten round to posting on the econs blog. The scans of the articles, dated 3rd May, are shown below:

Pardon the small print! Information from the article will be demarcated in blue.

These articles discuss the pressing issue of inflation and its impact on the lower-income sector of the Singaporean society. For simplicity's sake, this review will begin by addressing the former.

As defined by the article, inflation is a rise in the general level of prices for goods and services, ranging from food to transport to housing, health care, education and leisure. In a more economical sense, it is the measurement of the annual percentage increase in prices, typically consumer prices (John Sloman, 2006). Singapore's inflation rate has been increasing, from 2.1% last year, to "a 26-year high of 6.7%". (This rise in inflation means a faster increase in prices). The Government forecasts this year's inflation to be around 4.5% to 5.5%.

Inflation may be caused by both domestic and international factors. Government policies contributing to the rise in inflation include the GST rise (from 5% to 7%) and the increase in ERP rates (the base rate of $1 has been double to $2 this year). But, this seems to be offset by lesser demand for labour and office space - which would mitigate the current shortage - causing housing, commercial and retail rents to fall slightly, as a fall in demand will see a consequential fall in prices - albeit just to a small extent.

However, while domestic upward pressure on prices seems to be easing - since local causes like the GST hike are once-off and hence have temporary effects that will gradually diminish - global inflation continues to perpetuate, at least, for much of the near future. The main driving force: surging demand for food and oil, due to the rise in income for millions in India and China. These developing nations, poised to become the new great superpowers on the world stage, experience unprecedented growth: India's GDP growth from 2006-2007 was 9.4%; China's GDP is expected to rise by 8% annually till 2010. As the income of these nations increase, so will the income of their people. Since both food and oil are normal goods, their income elasticity of demand is positive: demand rises as income rises.

Yet, as demand increases, the rise in supply does not occur in tandem. Food supply cannot keep up because of disruptions owing to bad weather (like the November cyclone in Bangladesh) and disease outbreaks. In addition, large swathes of agricultural land (in places like Thailand and Vietnam) are now producing crops for biofuels (and industrialisation). Oil supply remains limited as OPEC cartel members stick to their quotas (as OPEC produces about 40% of the world's oil it has a large market share and can exercise monopoly power to maintain high prices to maximise their revenue, since oil, being a necessity, has a price-inelastic demand) and non-OPEC countries are slow to raise their output (partly due to depleting reserves). When supply does not rise proportionately to demand, there will be an increase in the price.

Investors further push up commodity prices, as they may speculate the prices to continue to spiral upwards. Panic-buying and hoarding of these commodities also contributes to soaring prices.

In an effort to alleviate the impact of inflation, the Monetary Authority of Singapore (MAS) has allowed the Singapore dollar to appreciate (a rise in the free-market exchange rate of the domestic currency with foreign currencies (Sloman, 2006)) against other currencies. This will help to curb the price increases for imported goods, for the Singapore dollar now has a higher value attached to it.

What does inflation mean to us Singaporeans? Ordinary Singaporeans have little choice to spend more on food. This is the sad truth, since food is a necessity - its demand is price-inelastic. While those belonging to the middle and upper income groups may accomodate this by being more prudent in their spending, the poor and low-skilled will suffer. This is a result of many companies "cheap-sourcing" - going for the cheapest labour regardless of quality. Hence, these low-skilled workers will find themselves in a quandary whereby they either accept a lower wage or risk unemployment.

Please correct me if there are any horrendous misconceptions and inaccuracies!

Best regards,

Jeremy Lim