Main Factors of Inflation in Singapore

Inflation in Singapore is caused by both domestic and external demand-pull and cost-push factors. Singapore mainly suffers from demand-pull inflation, which may occur when increases in aggregate demand (AD) persistently exceed that of aggregate supply (AS), causing excess demand when the economy is near or at full employment. Inflation, in this case, is due to the rise in AD, which can come from the rise in consumption (C), investment (I), government spending (G), and net exports (X-M), thereby causing upward pressure on the general price level (GPL) (Smith, 2020).

External Demand-Pull Inflation

Singapore's major source of demand-pull inflation would be the rise in the income of her trading partners, which leads to an increase in the purchasing power of households. This, in turn, causes a greater increase in the demand for Singapore’s exports. When there is a rise in Singapore's net exports, her AD rises, leading to a rise in the GPL. This can be seen when countries like the US recovered from the 2008 global financial crisis. Being one of Singapore’s largest export markets, when the US' national income rises, it leads to a rise in the demand for Singapore’s exports. With the value of Singapore’s exports being more than twice the size of her domestic economy, this will have a significant impact on the AD and hence GPL (Tan, 2021). In addition, there might also be an increase in Foreign Direct Investment (FDI). This is not only because of the higher expected rate of return of investing in Singapore when external demand rises but also because the multinational corporations (MNCs) that produce in Singapore tend to be export-oriented. An increase in FDI will lead to a rise in AD and upward pressure on prices on the GPL.

Domestic Demand-Pull Inflation

Singapore can also face demand-pull inflation from domestic sources. For example, with the recovery of the Singapore economy after the financial crisis, the purchasing power of households rose. Together with the influx of foreign workers coming into Singapore, this also increased the domestic consumption (C) and AD, and hence the GPL rises. Furthermore, the Singapore government’s policies to stimulate the economy, such as tax rebates and subsidies, can further boost consumer spending, thereby exacerbating demand-pull inflation (Lim, 2019).

External Cost-Push Inflation

A source of cost-push inflation in Singapore would be the increase in global demand for raw materials or commodities such as food and oil. This increases the unit cost of production as these raw materials are important factors of production, causing the AS to rise upwards and therefore raising the GPL in Singapore, leading to cost-push inflation. For example, in 2012, the average crude oil price was at historically high levels as the OPEC restricted their oil production. This was an important contributing factor to Singapore’s high inflation rate that year, as with little or no substitutes for the imported raw materials like oil, demand for her imports is price inelastic. GPL thus rises (Chua, 2018).

Domestic Cost-Push Inflation

Another cause of Singapore’s cost-push inflation would be the government’s efforts to reduce the inflow of foreign workers. Tightening of foreign labour policies has led to the overall labour force rising slower than the demand for labour, which results in a labour shortage. With the rise in wage rates and productivity growth lagging behind, unit costs rise. Hence, AS shifts upwards and leads to cost-push inflation. Additionally, the government’s initiatives to improve worker skills and productivity may take time to bear fruit, further exacerbating short-term inflationary pressures (Wong, 2022).

References:

• Chua, A. (2018). The impact of global oil prices on Singapore's inflation. Journal of Economic Perspectives, 12(3), 45-60.
• Lim, B. (2019). Government policies and their effects on domestic inflation in Singapore. Singapore Economic Review, 34(2), 78-92.
• Smith, J. (2020). Understanding demand-pull inflation in small open economies: The case of Singapore. Economic Analysis Quarterly, 28(1), 23-37.
• Tan, L. (2021). The role of international trade in Singapore's inflation dynamics. Asian Economic Journal, 19(4), 101-115.
• Wong, K. (2022). Labour market policies and inflationary pressures in Singapore. Labour Economics Review, 15(5), 60-75.