Steering clear of deflation

Singapore is experiencing its longest spell of negative inflation in almost four decades.

However, this does not mean trips to the hawker centre or supermarket will be getting any cheaper - and thankfully so, as that would be a sign of a much deeper economic malaise.

Singapore had its 15th straight month of negative inflation in January. The consumer price index, a measure of headline, or overall, inflation, fell 0.6 per cent from January last year.

Lower global oil prices, falling car prices and accommodation costs - partly due to the soft property market - have been the main drivers behind this bout of negative inflation. However, the costs of daily household spending, such as on food and healthcare, are still rising.

While Singapore's central bank has cut its inflation forecast for the year amid the rout in global oil prices, it has kept forecasts for another key measure, core inflation, unchanged. This is because oil-related items make up a smaller share of the core inflation basket.

Core inflation strips out accommodation and private road transport costs to better gauge everyday expenses, and is expected to come in between 0.5 per cent and 1.5 per cent this year.

In fact, core inflation is expected to pick up gradually over the year, as the price-dampening effects of one-off Budget measures fade.

This is why the central bank and most economists here do not regard this run of falling prices as "deflation", a term reserved for a more sustained and entrenched economic problem with often dire results. Deflation indicates a chronic lack of demand across an economy, and is often accompanied by falling wages and asset prices, as well as an economic recession. Many advanced economies have been trying to fend off this threat, which is looming larger amid poor sentiment and tepid growth.

The prospect of falling prices might bring shoppers cheer, but if actual deflation arrives in Singapore, there would be few reasons to feel upbeat.

A version of this article appeared in the print edition of The Straits Times on February 26, 2016, with the headline 'Steering clear of deflation'. Print Edition | Subscribe