There has been growing concerns about the increase in prices in Singapore. On a year-on-year basis, Singapore’s headline inflation increased by 4% in December 2021. This is a near nine-year high.
Singapore’s policymakers have responded. In January 2022, the Monetary Authority of Singapore (MAS) appreciated the currency, the second tightening move in three months. In December 2021, the Singapore government introduced new property cooling measures to reduce the demand for private housing.
Will these policies be able to derail the rise in general price levels in Singapore? To address this question, we will need to understand the drivers of inflation, and what’s different about inflation this time.
The main point to note is that the inflation experienced by Singapore is a global phenomenon. Prices are rising all over the world. In the United States, the Consumer Price Index increased by 7% in December 2021 on a year-on-year basis. In Europe, the inflation rate rose to 5% during the same time.
So, what causes this global inflation? We attribute this to the recent expansionary fiscal and monetary policies brought about by governments and central banks worldwide.
To combat the fallouts of the global pandemic, many countries embarked on an unprecedented scale in fiscal spending. For instance, in respond to the pandemic, the federal government in the United States allocated US$4.5 trillion in stimulus spending. In Singapore, the government committed close to S$100 billion through five budgets in financial year 2020, culminating in its largest budget deficit since her independence.
Moreover, monetary policy was highly accommodative worldwide. Interest rates were kept nearly zero or negative in many countries (such as Switzerland and Denmark). Central banks embarked on large scale of quantitative easing as they purchased huge amount of debt securities to prevent deep recessions.
Consequently, households and firms hence have the incentive to borrow freely and invest in assets globally. As Singapore is a world-interest rate taker, the interest rate in Singapore has been kept extremely low as well.
With so much money and liquidity flowing worldwide, investors search for yield and income globally. This led to huge capital inflows in many countries. As a major regional asset management hub, Singapore experienced an increase in capital and investment. In 2021, Singapore attracted S$11.8 billion in fixed asset investments.
It is no surprise that there is an increase in demand for real assets such as property in Singapore (by both local and foreign investors). In 2021, Singapore’s private home prices increased by 10.6 percent and HDB resale prices increased by 12.7 percent. Sales of shophouses also rose to an all-time high of S$1.9 billion. For freehold shophouses, the average unit price grew by 19.6 percent year-on-year.
To cool the market, the Singapore government has announced a series of new measures such as having higher taxes on second (and subsequent) property, as well as tighter limits on loans.
While this may make investing in the Singapore’s property markets less attractive in the short run, as long as Singapore’s property markets remain attractive relative to other countries, demand for Singapore’s houses will continue to rise.
Furthermore, foreign investors may turn to other asset classes that are not affected by the cooling measures, such as shophouses.
Singapore is not alone in having record high prices in the property market. Many countries in the world (such as the United States, United Kingdom, South Korea) have experienced an increase in home prices by more than 10% in 2021.
We believe the key issue lies in the unprecedented stimulus from fiscal and monetary policies worldwide. Only when there is a tightening of the fiscal and monetary spending by governments and central banks globally, then we will see a slowdown in inflation.
Nonetheless, the unwinding of the expansionary fiscal and monetary policies will be challenging. First, there is an issue of whether the inflation is transitory or permanent. For the most parts of 2021, the US Federal Reserve believe that inflation is “transitory” and will not leave “a permanent mark in the form of higher inflation”.
Inflation could be transitory for several reasons. One reason is related to the supply bottlenecks. Due to the coronavirus pandemic, there has been severe bottlenecks in the supply chain as factories were closed and workers were unable to work
This has led to a shortfall in raw materials, impacting other related industries. For instance, semiconductor shortages have hindered the production of automobiles, driving up its prices.
However, this will be resolved with the gradual re-opening of the economy, firms investing in their supply chains, and workers returning back to work. If the inflation is indeed transitory, then there will be little need for policymakers to cut back on their stimulus packages.
While the US Federal Reserve has recently indicated that inflation is no longer transitory and that it could soon increase interest rate in March 2022 (its first since December 2018), it is still unclear the extent in which it would increase the interest rate. However, will it be too late?
Countries have begun to tighten the economy. In February 2022, the Bank of England increased its interest rate back-to-back. This is the first time since 2004. In January 2021, MAS appreciated the currency in an off-cycle move. This is the second time in three months.
Nonetheless, it remains to be seen how the other central banks respond. For inflation to be brought down this time, monetary and fiscal policies need to be tightened systematically by all global stakeholders.
As long as there is excessive amount of money circulating around in the global economy, inflation is here to stay in Singapore.
The article is an abridged version of the one first published in CNA.