TL;DR – We may not feel that way, but the data really does say so.
Mr Chan Chun Sing, Minister of Trade and Industry, said in Parliament recently that overall inflation in Singapore has declined between 2012 and last year compared with the five-year period before it. That doesn’t mean that the cost of living has gone down. The cost of living has still gone up, but it’s going up at a slower pace.
That doesn’t sound right. That’s not what we experience day to day. It feels like we are spending more everyday.
So how can Minister Chan say that overall inflation in Singapore has declined?
Minister Chan came to the conclusion by looking at the change in the Consumer Price Index (CPI).
The Consumer Price Index (CPI) is designed to measure the average price changes of a basket of goods and services commonly purchased by the households over time.
Prices of items used in the computation of CPI are collected from a large number of retailers with a wide range of varieties such as brands, sizes and packaging. While prices of some items may increase significantly at one retail outlet, there are also others where prices have increased more moderately, remained stable or even declined. Taking into consideration the price movements of all these items, the change in the overall CPI thus represents the average price movements across the different selected items sold at various selected retailers.
The CPI reflects the collective experience of inflation for all households. It does not correspond to the experience of any particular household.
As no two households have exactly the same spending pattern, and prices of different types of goods and services increase/decrease at varying magnitudes, each household’s experience of inflation will therefore be different. Depending on the goods and services purchased by each individual household, changes in prices will impact each household to a different extent.
See this example:
What’s included in the basket of goods?
To ensure that the CPI remains relevant, the basket of goods that is used to calculate the CPI is updated once every five years. This is done by finding out what households spend on. The government finds this by surveying resident households. Resident households are defined as households headed by Singapore Citizens or Permanent Residents.
This survey is known as the Household Expenditure Survey (HES). It’s conducted once every five years. A total of 6,600 brands/varieties are included in the 2014-based CPI basket.
The HES also helps to determine the weights of the items in the basket of goods and services. In the compilation of the CPI, weights are required to reflect the relative importance of each item in the basket, that is, their share as a proportion of total household expenditure. Households tend to spend more on some items and less on the others. As a result, price movements in different items will have different impact on the households.
The CPI and the weights of the CPI was last updated in 2014. The 2014-based CPI weighting pattern is as follow:
The 2014 CPI is then set to be the base against which subsequent year’s CPI is compared to.
For ease of comparison, the 2014 CPI is set to have a value 100. So if this year’s CPI is above 100, it means that the average costs of things in the basket of goods and services is more expensive this year compared to 2014. Conversely, if the CPI is lower than 100, it means that the cost of things int he basket of goods and services is less expensive this year compared to 2014.
How do we know the prices?
The price data used in the compilation of the CPI are obtained from a wide range of retailers and service providers commonly patronised by households.The total number of outlets selected for pricing is about 4,200. Prices collected refer to those actually paid by consumers, that is, inclusive of taxes levied and net of subsidies granted on the specific individual good or service. Special offers and discount prices are considered if they are valid for a sufficiently long period and the items are available in reasonable quantities (e.g. supplies are not limited to first few customers only).
The price data are obtained through a combination of data collection modes. Prices of most goods and services such as utility tariffs, petrol, school fees, are obtained through postal/email enquiries or websites while those of perishable food items sold at wet markets are collected by field interviewers.
The frequency of data collection depends on the price behaviour of the item. Those items whose prices are volatile (e.g. perishable food items) are collected every week while items with more stable prices such as service & conservancy (S&C) charges for HDB flats, utility tariffs, bus/train fares, school fees, medical services and household durables are priced monthly, quarterly, half-yearly or as and when the prices/rates change.
Based on all those data…
The CPI based on the 2014 weights and basket of goods and services are then compiled and calculated every month. The CPI for all items rose 0.6% a year on average for the past five years.
And in May 2018 (which is the latest available data), the CPI was only 0.4% higher than that of May 2017.
In other words, what Minister Chan said is accurate. For now.
The problem with what Minister Chan said is that it’s based on data from the past. The increases in water and utilities prices haven’t kicked in yet. Those increases will likely lead to the prices of a lot of other things to increase as well. For example, prices of food at hawker centres will probably increase.
So, while inflation might have slowed in the past five years, there’s a real possibility that it might speed up in the near future.
What’s the government doing about it?
Minister Chan pointed out that the government has eight strategies to help manage the increases in cost of living. These eight strategies have been devised to manage the “pressure points” which spark worries over costs of living amongst Singaporeans.
They include keeping the economy competitive, diversifying sources of supply for goods, focusing on giving help to those with less and working with social enterprises.
Will these strategies work?
We don’t know. But we sure hope so.
(Featured image via Gov.sg/Youtube)