The Straits Times says

Lessons from the battle against inflation

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As governments grapple with the highest inflation in decades, they face two broad policy challenges: controlling price pressures and protecting their citizens from the adverse impact of rising prices. Most central banks have tried to control inflation through hikes in interest rates, which reduce demand. But to the extent that inflation is caused mainly by supply-side factors like higher food and energy prices, like at present, rate increases not only have limited effects on prices but also tend to slow down economies. Thus, even after repeated rate hikes this year by central banks around the world, inflation has remained stubbornly high. This is also the case in Singapore, which uses exchange rate adjustments to reduce imported price pressures. Despite the Monetary Authority of Singapore having tightened policy five times since October 2021, headline inflation is expected to be around 6 per cent in 2022, the highest in more than a decade – although still below that in most other advanced economies.

The limitations of monetary policy in controlling inflation mean that policies to protect citizens from its adverse effects have taken on added importance. And here, there are lessons to learn from the experiences of other countries. Many developing economies in particular have long resorted to price controls as well as subsidies on essentials like food and fuel to blunt the impact of price increases. But they have quickly learnt that such policies do more harm than good. For instance, in September, Indonesia was forced to slash its fuel subsidies after their costs tripled this year because of rising energy prices, and the government acknowledged that 70 per cent of the benefits of subsidies went to the better off. Malaysia has scrapped its price controls on chicken and chicken eggs and is now moving to overhaul its entire subsidy regime, which costs almost as much as its total development spending. Even Britain was recently forced to cut the duration of its fuel price caps, which raised the government’s borrowing requirement and triggered a crisis in the government bond market.

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