Why It Matters

A clear idea of Singapore economy

Singapore has experienced negative headline inflation for 21 straight months now, but this does not mean it is getting cheaper to eat at hawker centres or shop at the supermarket.

Overall consumer prices fell 0.7 per cent last month from a year earlier, thanks largely to cheaper cars, lower utility bills and steep Great Singapore Sale discounts.

Budget measures and other one-off programmes - including medical subsidies under the Pioneer Generation Package and the reduction in the concessionary foreign domestic worker levy - also had a part to play in keeping a lid on price increases.

However, prices elsewhere in the economy continued to edge upwards. Food was 2.1 per cent pricier last month compared with the same month a year ago. The cost of household durables and services also went up, increasing 3.2 per cent.

As a result, core inflation - which strips out accommodation and private road transport costs to better gauge everyday expenses - ticked up 1 per cent last month from a year ago. Government and private sector economists expect core inflation to hold steady or inch upwards over the rest of the year.

They expect oil prices to recover, and the year-on-year impact of government programmes and subsidies to fade. However, another contributing factor is business costs, especially wages. These are still high despite the slowing economy and the perennial concern of flagging productivity.

Still, what is clear is that Singapore is not facing deflation. Although the official forecast is for inflation to remain negative throughout the year, the fall in prices has not been broad-based. This is in contrast to previous prolonged price declines that accompanied the 2008, 2001 and 1998 recessions, when prices were dragged down by a broad fall in demand.

Deflation indicates a chronic lack of demand across an economy, and is often accompanied by falling wages and asset prices, plus an economic recession. This is why the term "negative inflation" is a better description of current price developments.

A version of this article appeared in the print edition of The Straits Times on August 27, 2016, with the headline 'A clear idea of S'pore economy'. Print Edition | Subscribe