Note: This article was updated on 26 April 2022
Things are becoming more expensive.
Singapore’s headline and core inflation in March surged at the fastest pace in a decade, with the cost of food, services, private transport and accommodation all rising.
Singapore’s core inflation rate rose to a 10-year high of 2.9% year-on-year in March, and is expected to be significantly above its historical average through the year. Core inflation excludes accommodation and private transport costs.
March's headline inflation rate stood at 5.4% year-on-year, up from 4.3% in February.
As it is — and ahead of the March inflation data release — Singapore’s central bank had in April further tightened its monetary policy — marking the third tightening move made by the Monetary Authority of Singapore (MAS) in six months, and the most aggressive as well.
"The fresh shocks to global commodity prices and supply chains are adding to domestic cost pressures and will bring MAS core inflation to a significantly higher level than its historical average through 2022. Underlying inflationary pressures remain a risk over the medium term," MAS had said on April 14, 2022.
This comes as MAS upped its core inflation forecast to 2.5% to 3.5% this year. This is stronger than its January projection of 2% to 3%.
As at April, MAS has also projected headline inflation to hit 4.5% to 5.5%, with the previous range at 2.5% to 3.5%.
(Singapore's central bank uses the exchange rate to manage its monetary policy, reflecting the country's open and trade-dependent economy. The monetary tightening was done by both slightly raising the slope of appreciation, and re-centering the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at the prevailing level. The S$NEER is the exchange rate of the Singapore dollar as measured against a trade-weighted basket of currencies from Singapore’s major trading partners.)
While inflation hurts our pockets, that’s not the only impact to our finances that we should consider. Inflation has a clear impact on our real investment returns too, and in this time, investors are watching with care to see how policymakers manage sharply rising costs.
In simple terms, an investment that returns 2% before inflation in an environment of 3% inflation would have generated a negative return (-1%) when adjusted for inflation.
Assuming an estimated annual inflation rate of 2.5% deposits saved across 20 years on average deposit rates would lag inflation by about 35%. That means a customer with S$50,000 saved in cash would have saved S$53,406 after 20 years, which is less than the S$81,930 needed to beat the assumed 2.5% inflation rate.
But first, what exactly is driving inflation higher?
Inflation in Singapore
Inflation is the measure of how overall prices of goods and services increase over time. This includes tangibles (goods) such as groceries and household items, as well as intangibles (services) such as transportation.
The usual inflation indicator is the Consumer Price Index (CPI), which measures the percentage change in price of a fixed basket of goods and services commonly consumed by resident households. For example, the CPI overall inflation rate hit 4% in January 2022, which means that you are paying 4% more for the same set of goods and services compared with a year ago.
You may calculate inflation-adjusted prices of goods and services using the CPI inflation calculator.
What is driving inflation higher in Singapore?
The Russia-Ukraine war has pushed up global energy costs.
Russia, which launched an invasion of Ukraine in late-February, is among the top exporters of crude oil and natural gas in the world. In February, the Brent Crude benchmark shot past US$100 per barrel, a level not seen since 2014.
Even prior to the war, oil prices have been gaining, as demand for oil largely recovered to 2019 pre-pandemic levels, but supply remained tight.
All of this means that in Singapore, and elsewhere in the world, pump prices for petrol and diesel will go up. Electricity costs for households and businesses are also set to head north.
Global inflation driven by supply bottlenecks
Rising inflation is a global phenomenon, with global inflation rate ending at 4.35% in 2021.
This is an impact of the global pandemic that is into its third year. When Covid-19 cases surged, countries had to implement restrictions and lockdowns.
Supplies fell short as factories were unable to operate due to pandemic curbs. This meant that raw materials could not be processed in good time for assembly. The global shipping crunch also added to the delays.
China's lockdown policy today is also adding to the supply-chain drag.
These supply-chain constraints would mean higher import prices down the line. Singapore, an open economy that relies heavily on imports, is challenged by import-driven inflation.
Expansionary fiscal policy
Governments around the world responded to Covid-19 with restrictions that curbed social interaction. This also meant severe business disruption. If businesses shut down, that also would mean job losses for workers. So governments stepped in too with relief measures to support businesses through the pandemic-induced global recession. This is otherwise known as an expansionary fiscal policy
In Singapore, the government spent about $100 billion in 2020, tapping into the reserves to alleviate costs for businesses, and put cash in the hands of consumers. For perspective, all that relief translates to nearly 20% of GDP.
But Covid-19 also spurred debate over what is commonly known as a K-shaped recovery — that is, where some segments of the population or economy continue to do well, while the rest continue their decline. The broad-based fiscal support also meant comfortable room for those who could continue to spend, which could contribute to higher consumer prices. Prices of luxury cars rose. Luxury bags from well-known brands have also become more expensive in recent times.
Expansionary monetary policies
In response to Covid-19, global central banks also cut interest rates, a move that would lower the cost of borrowing — that is, the premium an individual or a business would need to pay to gain access to money. The rate cuts were aimed at keeping economies humming along in spite of the shock caused by a global pandemic. This is otherwise known as an expansionary monetary policy.
Singapore, as an open economy, manages its monetary policy through the trade-weighted exchange rate to ensure price stability and to tamp down inflation pressures; the central bank does not directly set interest rates.
Domestic interest rates here largely track global interest rates and account for expectations on the strength of the Sing-dollar. With the US Fed — and other global central banks — cutting rates, the benchmark rates in Singapore trended lower too.
In the low-rate environment, individuals turned to investments such as property, particularly since they could borrow cheaply to snap up such assets. Private residential properties rose 10.6 per cent in 2021 after successive gains in each quarter of last year. The last time prices shot so high was in 2010.
Expectations on inflation
Sometimes, there is also a self-fulfilling element involved in inflation. If you succumb to your inner voice saying, “I should buy more now before the prices increase”, you may be one of several who acted on that impulse. That increased consumption can in turn boost demand, and contribute to pushing up prices.
Managing your finances better with inflation
While sharper inflation can be intimidating, rising prices more broadly — and under more conventional times of recovery — is a consequence of better living standards in most developed economies. The bottom line is that you must stay ahead of inflation by hanging on to your purchasing power. Here are some tips.
Spend on unavoidable expenses now
Listing down your needs and wants is a good start to identifying your necessities. The items in your “needs” list will probably include food, beverages, and certain household goods that you use year-round. Don’t miss out on the larger ticket items such as rent.
Do not hold more cash than necessary
As you now need more cash than before to buy the same set of goods and services, your money is essentially losing value. Resist the temptation to cling on to more cash, because it continues to depreciate by the day as prices continue to rise.
Instead, set aside enough cash for your daily life that you can easily access — just enough to stay liquid so you can quickly tap money for emergencies too — and put the rest in appreciating assets.
Invest your cash in growth assets
Investing to grow your wealth acts as a form of protection against inflation.
Growth assets with expected growth over time allows you to enjoy capital appreciation. But to be clear, while assets such as equities offer the ability to appreciate, they can also experience downturns. So remember to make your investment selection based on your personal risk tolerance, investment horizon and financial goals.
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.