July 27, 2012
Singapore, 27 July 2012 – Singapore households’ one-year-ahead inflation expectations seems to have edged up at around 4.4%. The fourth survey on inflation expectations Index released by MasterCard and Singapore Management University (SMU) shows that Singapore’s inflation expectations inched up slightly in the second quarter of 2012. This may be attributed to more informed consumers who are anxious although cautiously optimistic towards the global economy in the short to medium term.
The SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx) was launched in January 2012. It was developed by Dr Aurobindo Ghosh and Professor Jun Yu from SMU Sim Kee Boon Institute for Financial Economics (SKBI), in collaboration with MasterCard. SInDEx is derived from an online survey designed to help researchers understand the behaviour and sentiments of decision makers in Singapore.
This fourth SInDEx survey follows three earlier surveys conducted in September and December last year, and in March this year. The fourth online survey was conducted in June 2012 and it gathered feedback from around 400 individuals from Singapore households. Consumers were asked a variety of demographic and socioeconomic questions. The consumers also shared their views on perceived values of economic variables over the next one to five years.
The June 2012 quarterly survey showed for the current year, the SInDEx1, a composite medium term inflation expectations index which measures inflation expectations over the next one year, has slightly increased to 4.4% up from its record low of 4.2% in the March 2012 survey. The Headline inflation expectations (which measures overall inflation expectations for the coming one year) rate is slightly higher at 4.45% up from March 2012 survey value of 4.13%, which was also the lowest since the inception of these quarterly surveys in September 2011. The medium term Singapore Core inflation expectations (excluding accommodation and private transportation) also edged up to 4.39% from its lowest ever level of 4.2% recorded in the March 2012 survey.
As for the next five years, SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx5, the composite weighted five-year inflation expectations) was at 5.08%, from 4.97% in March this year. The five-year Headline inflation expectations (which measures overall inflation expectations five years from now) was back to 5.37% from 5.2% last quarter. The five-year Singapore Core inflation expectations (excluding accommodation and private transportation) moved up slightly to 4.91% from the March figure of 4.8%.
From the latest data, it would appear that the long term inflation expectations although decreasing is quite “sticky” or persistent and is anchoring towards a long run steady state rather slowly.
Figure 1: One-Year-Ahead Inflation Expectations
Figure 2:Five-Year-Ahead Inflation Expectations
However, researchers at SMU SKBI are hopeful that with frequent communications and updates from MAS policy makers the consumers are gradually anchoring their long run inflation expectations that ideally should not fluctuate substantively for ephemeral changes to commodity prices like oil and food.
Dr. Aurobindo Ghosh, co-creater of SInDEx and Programme Director at SMU SKBI said, “The CPI-All Items inflation rate came down from 5.4% in April to 5% in May 2012, and then to 5.3% in June 2012. For the whole of Q2 it averaged 5.3% close to the median Q2 forecast of 5.2% published in the MAS Survey of Professional Forecasters in June 2012. This is contrary to the expectations of some economists in April 2012 that the headline inflation might go as high as 6%. In our opinion, the information transmitted by MAS policy makers through various channels was quite effective in anchoring expectations in the medium term. From our surveys, we see early indications that the One-Year–Ahead inflation expectations are plateauing rather than gaining upward momentum.”
For the One-Year-Ahead Singapore Core inflation rate, the latest research findings suggest that the public perception of inflation expectations continues to be high at 4.39%. This is significantly higher than the 2.7% that the current MAS Survey of Professional Forecasters had predicted for 2012.
Dr. Ghosh pointed out that there are three possible ways of reconciling this finding.
“First, as some academics have found that consumers’ own frequent purchasing decisions sometimes influence public perception despite regular communications from policymakers. Second, the consumers interviewed might have been influenced by global events like uncertainty surrounding the Eurozone. The situation was fuelled further by reports of alleged impropriety by some European bankers and inflationary conditions in China. Therefore, the consumers may tend to believe that imported inflation might play a major role in the future. Finally, consumers often retain a more pessimistic view for a longer period of time, and thus that might have a knock-on effect on their perception of Singapore core inflation expectations.”
Dr. Ghosh emphasized, “Real implications of such inflation expectations are threefold. First, have the policymakers effectively communicated future expected inflation rates to the public? Probably yes, at least to a limited extent. Are these rates fluctuating with short term news, meaning, is the inflation expectations well anchored? Probably not yet but it’s getting there. This problem is not peculiar to Singapore, as even in the US, The Conference Board US Consumer Confidence Inflation Rate Expectation for the 12 Months ahead published in June 2012 was 5.3%, which is substantially more than the steadily declining inflation rate of 1.7%.”
“Finally, what implications does high long term inflation have on real interest rates? A 5% long term inflation expectation will mean the real rate of interest in the economy is strongly negative, as the nominal rate is very close to zero. This perception of depreciation of purchasing power is a serious problem facing policy makers,” Dr. Ghosh added.
Dr. Yuwa Hedrick-Wong, global economic advisor, MasterCard Worldwide, said: “The steadying of inflation expectation points to an improved outlook amongst consumers in Singapore about the global economic situation, despite ongoing concerns in the Eurozone. To the extent that Singapore consumers are becoming convinced that there is a stable outlook in future inflation, it then bodes well for more robust and sustainable consumer spending growth for the Singapore economy.”
Two indices were created, SInDEx1 and SInDEx5, to measure the 1-year inflation expectations and the 5-year inflation expectations. The data for the SKBI-MasterCard Survey was collected online from about 400 consumers. The sampling was done using a quota sample over gender, age and residency status to ensure representativeness of the sample. Employees in some sectors like journalism, marketing were excluded as that might have an effect on their responses to questions on consumption behaviour and expectations.
MasterCard (NYSE: MA), www.mastercard.com, is a technology company in the global payments industry. We operate the world’s fastest payments processing network, connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries and territories. MasterCard’s products and solutions make everyday commerce activities – such as shopping, traveling, running a business and managing finances – easier, more secure and more efficient for everyone. Follow us on Twitter @MasterCardNews, join the discussion on the Cashless Conversations Blog and subscribe for the latest news.
A premier university in Asia, the Singapore Management University (SMU) is internationally recognised for its world class research and distinguished teaching. Established in 2000, SMU’s mission is to generate leading edge research with global impact and produce broad-based, creative and entrepreneurial leaders for the knowledge-based economy. It is known to be a pioneer for its interactive and technologically-enabled pedagogy of seminar-style teaching in small class sizes which remains its unique hallmark.
Home to more than 7,200 students, SMU comprises six schools: School of Accountancy, Lee Kong Chian School of Business, School of Economics, School of Information Systems, School of Law and School of Social Sciences, offering a wide range of bachelor’s, master’s and PhD degree programmes in business and other disciplines.
With an emphasis on generating rigorous, high impact cross-disciplinary research that addresses Asian issues of global relevance, SMU faculty collaborates with leading foreign researchers as well as partners in the business community and public sector through its research institutes and centres. Through executive education, the university provides public and customised training for working professionals in meeting the needs of the economy. Close relationships with leading universities, including The Wharton School, Carnegie Mellon, the University of Pennsylvania and the University of Chicago’s Booth School of Business, allow SMU to draw on their academic and research strengths in various collaborations. The SMU city campus is a state-of-the art facility located in the heart of downtown Singapore, fostering strategic linkages with the business and wider community. smu.edu.sg
Established in July 2008, the Sim Kee Boon Institute for Financial Economics (SKBI) at the Singapore Management University promotes the study of Financial Economics and Financial Econometrics in areas of strategic relevance to Singapore's economy and the economies of the region. A significant addition to Singapore's efforts to be a financial hub in Asia, SKBI is a leading institute for academic research with strong industry application and practical dimension in the area of Financial Economics.
The Institute has four major research centres for quantitative financial analysis and offers training programmes for professionals in the financial industry. Its work is conducted in close collaboration with leading scholars in financial economics and financial econometrics from around the world as well as leading international organisations and experts from industry. www.smu.edu.sg/institutes/skbife
Huang Peiling, SMU
+65 6828 0964,
Gladys Ng, SKBI, SMU
+ 65 6808 5229,
Georgette Tan, MasterCard Worldwide,
+65 6390 5971,
Rob O’Brien, Weber Shandwick,
+65 6825 8064,
Headline Inflation Expectations
Overall inflation expectations
Singapore Core inflation expectations
Inflation expectations excluding accommodation and private transportation related expenses.
A composite medium term inflation expectations index which measures inflation expectations one year ahead with lower weights on accommodation, private transportation, food and energy expenses.
A composite five-year inflation expectations which measures inflation expectations five years ahead with lower weights on accommodation, private transportation, food and energy related expenses.