Wednesday, February 01, 2012

The dollars and sense of inflation

IF THE latest report card on inflation in Singapore could be summed up in one word, it would simply be this: confusing. For most of last year, inflation was uppermost on the minds of policy makers, as they warned that rising prices from raw commodities as well as higher costs of owning a car would raise headline inflation.

By Aaron Low, Economics Correspondent
So it was not a surprise that inflation last year hit 5.2 per cent, the second-highest rate in nearly 30 years, after the 6.6 per cent rate seen in 2008.

But the inflation report also came with two additional indicators which complicate the picture, suggesting that the high headline inflation is not as bad as it seems.

The first was a breakdown of how inflation had affected the various income groups.

Due to the rising costs of private transport and property rental, the top 20 per cent of income earners were hit with a 5.7 per cent inflation rate, according to the Department of Statistics (DOS).

The bottom 20 per cent, largely because they do not own private transport and live in cheaper housing, saw prices rise by 4.7 per cent.

Another new indicator which was released excluded the costs of housing rents.

DOS reasoned that since most Singaporeans - 87.2 per cent in fact - own their own housing, rising rents do not affect them directly, as cash is not spent on monthly rentals, which have been rising strongly.

That being the case, the new indicator was compiled 'as an additional indicator to track households' actual expenditures', said DOS.

In this indicator, the inflation rate for the lowest 20 per cent was just 2.2 per cent, less than half the rate of 5.1 per cent that the top 20 per cent experienced.

Remove rent, and headline inflation drops to 4.2 per cent.

Depending on which indicator you pay attention to, you could get very different snapshots of the inflation picture here.

So is the glass half empty or half full?

These additional indicators suggest that inflation, although seemingly high, has not hurt the average man on the street too badly.

But dig a bit deeper, and there are many worrying questions that need to be asked before such a conclusion can even be reached, if at all.

Inflation is just one half of the equation when it comes to calculating the real impact of rising prices on the welfare of people.

What matters equally is how fast incomes have risen.

Sure, the lower income groups may have been hit with lower inflation but their incomes also traditionally rise by less than what the top 20 per cent group enjoys.

The release of the labour market report yesterday by the Ministry of Manpower showed that from 2006 to 2011, the real median income rose by 2.5 per cent a year.

But the 20th percentile group saw their incomes rise by a slower annual rate of 2.2 per cent in the same period.

Says DBS economist Irvin Seah: 'It is quite clear that the poorer sections of society are being hit harder by inflation if you factor in the pace of income growth.'

Secondly, while excluding the cost of rental may better reflect a family's actual cash outlay since most Singaporeans own their homes, it would also not be true to say that Singaporeans do not pay for their homes.

First of all, there is a good chance that those in the poorest income groups do not own homes and do pay rent, albeit subsidised. A family with a household income of $1,500 may pay between $123 and $275 in subsidised monthly rent for a two-room flat. That's still easily close to 10 per cent or more of their income.

Most Singaporeans use their Central Provident Fund savings to pay for the mortgages of their homes. While it may not be a cash outlay each month, it is a cost nonetheless.

Many top up their mortgage payments with cash, although there are no public records of the numbers.

'The fact is that people are feeling the heat of expensive housing prices,' notes Barclays Capital economist Leong Wai Ho.

'So factoring in the cost of housing is important, even though it is through the imperfect proxy of housing rents.'

Another oft-cited reason not to worry too much about a rise in the consumer price index is that a large part of the price rise results from higher housing costs, and higher costs of owning a car.

Soaring prices for Certificates of Entitlement (COEs) - which car-owners bid for to buy a car - are the main reason for transport prices recording double-digit growth for most of 2011.

So the argument is that those who do not own a car are not affected by higher transport costs. But higher COEs do find their way into some areas of transport costs, for example, higher fares charged by taxi companies.

And politically, this piece of circular reasoning is unconvincing: It is precisely because cars are so expensive that most people can't afford them.

What is more worrying is that prices are rising across the board.

The Monetary Authority of Singapore's core inflation measure, which excludes accommodation and costs of owning a car, stood at 2.6 per cent in December, much higher than the historic rate that is usually below 2 per cent.

Health-care costs rose steadily over the past year, by an average of more than 2 per cent. Similarly, education and stationery costs rose by more than 2 per cent on average for most of 2011.

The fact is that it is getting increasingly expensive to live in Singapore, for all segments of society.

So some may take comfort in dissecting the figures and interpreting them in nice-sounding ways.

But the real effort must be spent on figuring out how all these 'headline' numbers translate to everyday dollars-and- cents issues, especially for the lower income groups, and minimising the impact on them.