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6 Facts to Know About Inflation Simplified for You

2022-06-24 , 9:26 pm

You might have heard that Singapore’s core inflation hit a 13-year high of 3.6% in May 2022. But what exactly is inflation, how does it affect us, and how can we control it?

Here’s everything you need to know about inflation, simplified for you.

What Is Inflation?

Inflation is the sustained, excessive, and general increase in the price level of stuff over time.

Reader: Uh, OK, I didn’t need you to tell me that.

Alright, let me be more specific here. The inflation rate is the percentage change of the consumer price index, or CPI, over a defined period of time.

The CPI is used to measure the average price changes of a fixed basket of goods and services commonly purchased by most households. It is a weighted index, with different weights assigned to different items based on their importance.

So no, inflation isn’t calculated by accounting for the prices of every single good and service out there. This means that when the news reports that inflation is rising, you’re bound to see the price of almost everything you buy daily increase too.

Core VS Headline Inflation

Reader: Okay, but what is core inflation? Are there other inflations out there?

Core inflation, which is what hit a 13-year high recently, excludes certain items known for their price volatility. In Singapore, it means that the prices of stuff like private transportation are excluded, as these prices rise and fall frequently. Nobody would think that the price of your Grab ride is a good indicator of the price levels of other stuff that’s usually stable and not prone to random peak-hour pricings, like food.

On the other hand, headline inflation, or the CPI-all-items inflation, is the raw inflation figure as measured by the CPI. In this case, all the price changes of your Grab rides are included.

For May 2022, the headline inflation is 5.6%, while the core inflation is 3.6%. Usually, when people talk about inflation, they’re talking about core inflation.

What Causes Inflation?

OK, now that we know what inflation is, let us look at some of the causes of inflation. What makes the prices of stuff rise?

To put it super simply, there’s two causes of inflation: demand-pull inflation and cost-push inflation.

Demand-pull inflation means that the aggregate demand for stuff is higher than the supply of stuff at the current price levels. This basically means that people are demanding more than what people can supply at this price point. This then drives the prices up.

On the other hand, cost-push inflation occurs when there is an increase in the cost of production of goods and services. For instance, if there is an increase in the cost of raw materials or wages of workers, the aggregate supply will fall. This leads to a rise in prices if the demand for goods stays the same.

Sounds complicated, but as long as you remember that our market economy operates on demand and supply, you’ll understand.

How Does Inflation Affect Us?

The most obvious effect: the prices of our daily goods and services goes up, which means each dollar can now buy less stuff than before.

This might sound like a super duh moment, but if you think about it, it’s pretty serious: for fixed income earners whose income is fixed by our contracts, this fall in the value of money means we get to buy less stuff.

And unless you get a pay raise or find a way to make more money, for those who live paycheck-to-paycheck, it throws them into a situation where they have to decide which necessities to forgo.

Additionally, inflation hits harder in some areas than others. For instance, food inflation hit 4.5% in May 2022, and is predicted to hit 8.2% in the second half of the year.

In comparison, retail and other goods inflation hit 1.8%. So even if you tell someone to stop buying new clothes to make up for the cut in the amount of food they can buy… it might not even be enough.

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How Can We Tackle Inflation?

Now, don’t get me wrong. Inflation can be good for the economy if it is mild, as it could boost employment and investments.

But that’s the catch: it has to be mild. If not, it could lead to a fall in the standards of living for the population, amongst other impacts on the economy. So how can the government tackle inflation?

Since last October, the Monetary Authority of Singapore has tightened its monetary policy three times to try to tame inflation. This means that they made the Singapore dollar stronger to try to dampen demand and decrease the general price level.

Additionally, because the prices of overseas goods are rising cause of supply chain disruptions, a stronger Singapore dollar would make these imports cheaper. This thus mitigates the rise in prices of imports, which helps keep the local prices of goods and services stable, since Singapore is very import-reliant.

However, this does have a downside. Since our Singapore dollar is stronger, it means that Singapore’s exports are going to be more expensive in terms of overseas currency. This could prove to be a blow to growth as our exports become less competitive.

In fact, MAS’ economists have already lowered the forecast for 2022’s growth, from 4% to 3.8%.

$1.5 Billion Support Package

BTW, in order to help Singaporeans cope with inflation, the government announced a $1.5 billion package on 21 June.

Included in the package are additional goods and services tax vouchers, $100 utilities credits, as well as more help to local companies.

To learn more, you can read this article here.