Furry Brown Dog

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3.3% inflation due to population increase?

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Note: I have not been able to update this blog as of late due to increasing work commitments. Loyal readers (and I personally thank you for that) should check this blog much less often for updates. Reader comments may be unaddressed for some time.This is likely to be the last post you see for a long time (I will be coming back eventually).  A big thank you to those who have been reading this blog.

It was reported recently that the year-on-year inflation rate in Aug 2010 was 3.3%. At first glance this may not seem unusual.  After all, Singapore is projected to achieve double-digit GDP growth for this year; some 20% growth is not out of question. It is perhaps with this in mind that the government has argued that letting in more foreign workers is crucial to prevent the economy from overheating.  Singaporeans are told that unless more foreigners (whom are willing to work for lower pay) are allowed in, inflation will climb even more sharply higher.  But a more in-depth analysis of the factors behind this inflation appears to undermine that argument.

How much of inflation is due to demand factors and how much to supply? This is a question which until somewhat recently, has largely been assumed to be due to supply. What are supply side factors?  The usual argument goes something like this: Singapore is a small country where much of its domestic economy is dependent on imports, hence inflation is usually assumed to be due to import prices climbing higher; having to compete with China and India (two rising industrial giants) for imports simply means importers in Singapore have to pay more and this extra cost is passed down to consumers.  Apart from import prices, there are also costs due to labour.  Recently ranked in the top 10 costliest cities in the world, labour costs appear likely to climb even higher.

However, some economics-minded people have begun challenging some of those (dogmatic) assertions.  In an ST column, economics Prof Tilak Abeysinghe wrote that his recent research showed that some 55% of inflation in Singapore was due to factors other than import prices (non-tradeables).  This was also highlighted in an Alex Au post here.  Alex subsequently tried to dissect some of those factors including household wages, business rental prices and government fees.  But it appears that there was little or no substantiation provided for those possibilities.  Are rising costs really driving up prices?

To test that claim, I went to examine how labour and business costs have appreciated over the past year.  To my surprise, not only were there no evidence that input costs have increased, instead there was an evident decline of unit labour and business costs over the past year (2nd quarter to 2nd quarter):

Unit labour costs (or total labour cost per real unit of output) have declined 7.1% while unit business costs have fallen slightly more at -7.7%. Unit labour costs in manufacturing has actually declined a more shocking 25.8%. For the sake of completeness, here’s how the Department of Statistics defines business costs:

In short, labour costs have declined along with other costs.  So one can’t say that rising labour and service costs over the past year are responsible for 3.3% inflation. But how about import prices then? Have rising import prices been responsible for more expensive inputs which get passed down to consumers?  Turns out the answer is a resounding no as well:

Singapore import prices were 2.3% lower than in August 2009, the Department of Statistics said Wednesday. This was bigger than the 0.5% fall seen in July. Both the oil and non-oil indices fell 2.7% and 2.2% respectively.

In a separate communique, the statistical office said the manufactured products price index remained unchanged in August on a monthly basis, after falling 1.8% in July. Annually, it slipped 3.3%, faster than the 0.9% drop in the prior month.

So prices of imported goods have actually declined over the past year, and the producer price index (or the selling price received by producers) dropped some 3.3% year-on-year. In other words there is clear evidence that costs borne by retailers or in general businesses which deal directly with consumers (instead of other businesses) have actually fallen, rather than increased.

Demand, not supply

Now the big question on everyone’s minds is, if costs borne by businesses have all fallen instead of increased, what else could have caused the 3.3% inflation rate reported?  If it can’t be supply-side factors, so how about demand factors? Could inflation instead be explained by increased demand?  Indeed this seems to be the more likely explanation. To back this up let’s look at the jump in consumption expenditure on a year-on-year basis:

From 2nd quarter 2009 to 2nd quarter 2010 there was a 6.7% jump in consumer spending. So it seems that this would have had some effect in raising prices hence inflation.  But a more interesting picture emerges when we look at the increase in population growth over the same period:

Singapore’s total population increased by 1.8% in 2010, with most of it coming from non-citizens and PRs (mid 2009 to mid 2010).  Could this influx of foreigners be responsible for increased spending which drove prices up?

It’s about time Singaporeans stop kidding themselves that inflation is always or largely due to external factors (import prices) or business costs (labour and service costs). They should start worrying instead of the impact on inflation on the cost of living due to foreigner influx.  Foreigners may help lower labour costs, but ultimately they breathe the same air, compete for jobs and housing with locals, all of which add to the cost of living and this post has explicitly shown how even in the face of decreasing costs for business, inflation has risen some 3.3% due to demand factors. With this in mind, news articles such as this which warn that nasi lemak would soon cost $10 unless more foreigners enter Singapore is nothing but inflation scaremongering propaganda by the state media.

Update: It appears that according to official definition private consumption expenditure refers only to spending by people who have stayed in Singapore for over a year:

PCE refers to the final purchases of goods and services by households. It includes the expenditure of Singapore residents abroad such as tourist expenditure but excludes the expenditure of non-residents in Singapore.

For the compilation of PCE, residents are defined as all persons living in Singapore for more than one year. This definition conforms to the definition in the United Nations’ System of National Accounts (SNA). Residents include Singapore citizens, permanent residents and foreign workers. It also includes our diplomatic and military personnel working abroad since our diplomatic missions and military bases overseas constitute part of the economic territory of Singapore. Non-residents, on the other hand, include tourists, foreign military and diplomatic personnel working in Singapore.

So instead of looking at the population increase from 2009 to 2010, one should look at the one from 2008-2009 instead. The population increased 3.1% over that same period. But in general inflation due to increasing consumer demands doesn’t take into account whether the spending was due to foreigner who entered Singapore in 2009 or 2010. So the PCE component in some sense understates the increase in consumer spending since it excludes FTs who haven’t been in Singapore for at least a year.


Written by defennder

October 3, 2010 at 3:56 PM

10 Responses

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  1. […] Strangers in a Strange Land – Furry Brown Dog: 3.3% inflation due to population increase? […]

  2. Hi sir, though the import price index were lower for Aug 2010 as compared to 2009, there were some items that went up pretty high; for example sugar went up about 25% or crude rubber which went up almost 60%.

    Tan Kuan Han

    January 6, 2011 at 5:59 PM

  3. The MAS does not have a real inflation-targeting strategy like the US Fed. It is constrained by its policy of open capital movement and managed exchange rate of the SGD (which is largely linked to the USD). Thus, our inflation rate is greatly affected by the monetary policy of the US Fed. If the Fed wants to increase its money supply, it will also increase the money supply in Singapore. What the MAS usually does it to widen the trading band to allow for some appreciation/depreciation.


    January 7, 2011 at 1:48 AM

  4. Rent has gone up?


    January 7, 2011 at 11:41 AM

  5. I am actually thinking about the Pareto’s rule: that perhaps the import prices that have actually increased, which may comprise only a minority of the import price index; actually had a wider effect on the CPI.

    Tan Kuan Han

    January 7, 2011 at 8:02 PM

  6. Sorry, I meant Pareto’s Priciple.

    Tan Kuan Han

    January 7, 2011 at 8:02 PM

  7. […] labour costs in furrybrowndog.wordpress.com This entry was posted in All. Bookmark the permalink. ← Spot A Player Vice Travel […]

  8. What if the inflation were a good thing?


    May 18, 2013 at 12:37 AM

  9. “Singapore’s total population increased by 1.8% in 2010, with most of it coming from non-citizens and PRs (mid 2009 to mid 2010). Could this influx of foreigners be responsible for increased spending which drove prices up?”

    Edward Hughs is a demographer with a recent article on Japan in which he mentions a study that measured the correlation between population growth and inflation since 2000 and found a significant relationship, every year, across 24 countries. Japan’s trying to start some inflation, it’s really the growing tendril of the pyramid scheme human societies are. I’m sorry I don’t have the link in front of me, if you’re interested google Edward Hughes A.B.E. Japan and you should get his two most recent articles.


    May 19, 2013 at 6:50 PM

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