Major Causes Of Inflation In Singapore

Introduction

First of all, we need to find out what is inflation. Inflation is defined as a sustained increase in the overall level of prices for goods and services. It is measured as a percentage of annual growth. As inflation rises, every pound you have bought a smaller percentage of goods or services. The cost of a pound does not remain constant in the presence of inflation. The cost of a pound is observed in terms of purchasing power, which is a real, tangible goods that money can buy. When inflation increases, a decrease in the purchasing power of money. For example, if the inflation rate of 2% per year, then theoretically £ 1 a pack gum will cost £ 1,02 per year. After inflation, your pound can not buy the same goods it could beforehand.

There are several options on inflation:

• Deflation is when the general price level falls. This is the opposite of inflation.

• Hyperinflation unusually rapid inflation. In extreme cases this can lead to the collapse of the monetary system of the country. For example, one of the best examples of hyperinflation occurred in Germany in 1923, when prices rose 2500% in a month!

• Stagflation is a combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries in 1970, when the bad economy, combined with OPEC raising oil prices

Singapore was founded by a British trading colony in 1819. It joined the Malaysian Federation in 1963 but separated two years later and became independent. Singapore subsequently became one of the most prosperous countries with strong international trading links (its port is one of the world’s busiest in terms of tonnage handled) and per capita GDP equal to that of the leading countries of Western Europe.

Singapore has a highly developed and successful free market economy. It has a surprisingly open and corruption-free environment, stable prices, and GDP per capita is equal to that of the four largest countries in Western Europe. The economy depends heavily on exports, particularly in consumer electronics and information technology products. It was hard getting into the 2001-03 global recession, the downturn in the technology sector, as well as the outbreak of severe acute respiratory syndrome (SARS) in 2003, to curb tourism and consumer spending. Fiscal stimulus, low interest rates, export growth, and internal flexibility led to strong growth in 2004-07 real GDP growth averaged 7% per year. The government hopes to establish a new growth path that will be less vulnerable to global cycles of demand for information technology products – attracted a lot of investments in pharmaceuticals and medical technology production – and will continue its efforts to establish Singapore, Southeast Asia, financial and high technology center. Annual inflation rate in Singapore was 6.7% in March – the highest since 1982 – and in the country currently pays a high price in the establishment of a global city of the good life.

Causes of inflation:

Cost push inflation

Cost inflation occurs when companies respond to the increase in production costs due to higher prices in order to maintain their profits. There are many reasons why costs may rise:

Growth of imports of raw materials costs, possibly as a result of inflation in countries that are heavily dependent on exports of those goods or as a result of falling cost of money in the currency markets, increasing prices for imported goods. A good example of cost push inflation solution British Gas and other energy suppliers significantly raise prices for gas and electricity that costs for industrial and domestic consumers at various points during 2005 and 2006.

The increase in labor costs – a result of wage increases that exceed any improvements in productivity. This case is important in those industries that are “labor intensive. Companies may decide not to accept these higher costs on to their customers (they may be able to achieve some savings in other areas of business), but in the long term, wage inflation tends move in close contact with price inflation, because there are limitations on the extent to which any business can absorb more costs in wages.

Higher indirect taxes levied by the government – for example, increased excise duty on alcohol and cigarettes, increase in fuel duty, or possibly increase the standard rate of value added tax or expanding the range of products that VAT applies. These taxes are levied on producers (suppliers), which, depending on the price elasticity of supply and demand for their products, may refuse to accept the tax burden on consumers. For example, if the government would choose to collect a new tax on aviation fuel, it will contribute to rising cost push inflation.

Cost push inflation can be illustrated by an internal shift of short-term aggregate supply curve. This is shown in the figure below. A fall in SRAS causes a contraction of real national output together with a rise in the general level of prices.

Average earnings are basic salary + income from overtime, performance bonuses, profit-related pay and other additions to income

Productivity measures output performance per worker or output per man-hour. Increased productivity helps you to store the unit cost. However, if the income of people in work rising faster than productivity, then the cost per unit of labor increased

Growth of unit labour costs is a key factor in the growth of inflation in the medium term. Additional pressure on prices comes from the higher import prices, prices of commodities (oil, copper and aluminum), as well as the impact of indirect taxes such as VAT and excise duties.

Prices also rise when the company decided to increase their profits. They will likely do so during the recovery phase of the economic cycle.

The major causes of inflation and effect in Singapore:

Singapore’s inflation rate is double that of Malaysia, it is higher than Hong Kong and Australia. While inflation is generally higher around the world, Singapore’s inflation is far higher than the average for several reasons, here are the main ones:

Around a million of people added to Singapore’s population to in last years causing the population to grow from 3.7m to 4.6million

An overheated economy grew by 7% per year.

GST hike, transportation, utilities, hike, hike kindergarten fees, etc.

strong overheating of the economy, which grew by 7% annually over the past four years

The open-door immigration (the highest inflow in the world), which brought in millions of foreigners, and pushed the population of about 4.7 million people.

This entry shows Singapore’s the annual percent change in consumer prices compared with the previous year’s consumer prices:

Inflation rate (consumer prices): 2.1% (2007 est.)

Ways to decrease the Inflation:

Monetary policy

Rising interest rates will reduce the growth of aggregate demand in the economy. Slower economic growth will reduce inflation. Higher interest rates reduce consumer spending, because:

Higher interest rates increase borrowing costs, reducing spendings

Rising interest rates make it more attractive to save money

Rising interest rates reduce the disposable income of those mortgages

Supply side policies

Supply side policy aimed at improving the competitiveness and long term productivity. For example, privatization and deregulation have hope to make the company more productive. Thus, in the long run supply side policies, can help reduce inflationary pressures. However, supply side policy proposals of a lot in the long term. They can not be used to reduce the sudden increase in inflation

Fiscal policies

This is another policy of demand, similar to the action of monetary policy. Fiscal policy involves a change of government tax and spending levels, in order to influence the level of aggregate demand. In order to reduce inflationary pressures, the government can increase tax and reduce government spending. This will reduce aggregate demand.

Exchange rate policies

Policy of government alongs the level of the exchange rate of its currency. It may want to influence the exchange rate, using its gold reserves and foreign currency from its central bank to buy and sell currencies. It can also use interest rates (monetary policy) to change the value of the currency.

This report illustrates 2 interesting tables:

This below table shows the rank of countries which has the most inflation. This entry furnishes the annual percent change in consumer prices compared with the previous year’s consumer prices.

This entry shows the annual percent change in consumer prices compared with the previous year’s consumer prices.

Summary

In today’s economy, changes in aggregate demand lead to changes to changes in prices and production. In fact, because of the inflexibility of wages, prices may rise, even though the economy still has high unemployment and unused capacity.

Inflation occurs when the general price level increases (and deflation occurs when they tend to fall). Today, we expect inflation using the “Price Index” weighted average prices for thousands of individual products. The most important price index consumer price index, which measures the cost of consumer basket of consumer goods and services in relation to the cost of this bundle over a base year.

Inflation affects the economy in two ways: through redistribution of income and wealth and by changing the size and structure of production. Inflation and deflation are rarely balanced, and the expected type

References:

Parkin M., 2003, Microeconomics, 6th edition, Pearson Education, USA

Sloman J., 2004, Essentials of Economics, 3rd edition, Pearson Education, England

Samuelson.A and William D, Macroeconomics, 13th edition, McGraw-Hill book company, USA

http://news.bbc.co.uk/1/hi/wales/7061021.stm