Reasons for Recent Rise in Costs and Measures to Help Singaporeans Cope

Ms Jessica Tan Soon Neo asked the Minister for Trade and Industry (a) what are the reasons for the recent rise in costs impacting consumers across many areas; and (b) what policies or measures will be put in place to manage the impact of these increases on consumers, especially lower-income households and those whose livelihoods have been impacted by disruptions caused by the current pandemic.

Thank you, Mr Speaker. I will provide an overview of the drivers of inflation, the outlook ahead, as well as how inflation is being managed. The Second Minister for Finance will then address the questions relating to the Government's fiscal and household support measures.

Mr Speaker, Sir, today, several global factors are at work, behind the rise of inflation.

First, the world economic recovery has raised the demand for energy and pushed up global energy prices even as supply remains tight. Second, global food commodity inflation is climbing as global demand grows amid the supply constraints that is caused by climate change, weather-related disruptions and labour shortages in key food-producing countries. Third, supply bottlenecks in key global industries and transport hubs have exacerbated cost pressures, including higher logistics costs.

Hence, many countries are grappling with inflation. For instance, inflation in the US climbed to 6.8% on a year-on-year basis in November last year, its highest in 39 years. In the Eurozone, inflation in November 2021 was 4.9%, the highest in 25 years. In Asia, South Korea's inflation hit a decade-high of 3.8% in November.

As a small and open economy that imports most of our items, we are subject to these global economic forces as well. The rise in domestic inflation comes largely on the back of external inflation. Items like petrol, electricity and gas, as well as food prices and imported products are affected by the global drivers I have just described. In the third quarter of 2021, Singapore's CPI-All Items inflation averaged 2.5% on a year-on-year basis and rose to 3.8% in November 2021.

Besides global forces contributing to this northward trend, there are domestic factors at play too, for instance, accommodation and private transport costs. Car prices have been rising at a faster rate due to bigger reductions in the Certificate of Entitlement (COE) quotas and the continuing strong demand for cars. Due to construction delays brought on by COVID-19, the need for rental housing has edged up.

However, as accommodation costs comprise mainly of imputed rentals on owner-occupied accommodation and most Singaporeans live in owner-occupied homes and use public transport, these two factors are not likely to apply to all Singaporeans.

Hence, a more useful gauge of inflation which excludes these two items is the Monetary Authority of Singapore (MAS) Core Inflation rate, which is so far, lower than the headline inflation. While MAS Core Inflation has moved up from 0.4% year-on-year in the first half of 2021 to 1.1% in the third quarter of last year, and to 1.6% last November, it is still lower than the headline inflation of 2.5% and 3.8% over the same period.

Let me now turn to the outlook ahead, which several Members have asked about, including Ms Jessica Tan and Mr Derrick Goh. In the near term, Singapore is likely to continue to face external cost pressures. This is due to global energy prices remaining elevated and bottlenecks in global transportation, as well as supply-demand mismatches in various commodities and goods markets, which are likely to persist for a while. However, the Ministry of Trade and Information (MTI) and MAS expect these rises to be temporary and pressures to ease gradually over the course of the year. In particular, global oil prices should ease as production increases to catch up with demand.

On our domestic labour front, wage growth is likely to continue to improve as the demand for labour strengthens on the back of a continued pick-up in economic activity. The Government’s roll-out of Progressive Wage policies such as the expansion of the Progressive Wage Model to the retail sector would also support wages for lower-wage Singaporeans. At the same time, as the COVID-19 situation stabilises, consumer demand should improve.

With all these factors in mind, MAS Core Inflation is expected to increase in the first half of 2022, before easing in the later part of the year. For the full year, MAS Core Inflation could average within the upper half of the official forecast range of 1% to 2%. As for CPI-All Items inflation, it is projected to average 1.5% to 2.5% in 2022, following the 2.3% expected for 2021.

MTI and MAS will carefully monitor price trends over the next few months of the year closely, before revising the forecasts if necessary.

Mr Saktiandi Supaat asked about the second-round effects of inflation and whether it will persist. MTI and MAS's assessment is that while household inflation expectations have risen slightly, they remain well-anchored. In particular, household expectations of inflation have remained below historical averages. Hence, MTI and MAS do not expect persistent, accelerating inflation.

Mr Shawn Huang asked about the forward-looking inflation indicators that are being monitored. Both MTI and MAS monitor a range of upstream cost indicators to form a forward-looking view of inflationary pressures in the economy. We closely follow external indicators like the global commodity prices reflected by the Brent crude oil benchmark, as well as international food commodity price indices and import prices. Domestic indicators consist of business cost measures such as resident wages and commercial rentals.

Mr Speaker, the Government understands and shares the concerns of fellow Singaporeans and businesses and households about the price increases and empathises with the cost pressures felt. While the small and open nature of our economy constrains how much we can shield Singaporeans from inflationary pressures, the Government will spare no effort to lessen its impact. We have put in place a multi-pronged strategy to mitigate inflationary pressures.

First, the Government is striving hard to keep the Singapore economy competitive, so that we keep creating good jobs for Singaporeans and to bring sustainable wage growth for Singaporeans. For example, before the pandemic, from 2014 to 2019, Singapore's economy was expanding by 3.1% per annum on average. In tandem with economic growth, the real median income of full-time employed residents and that is, after accounting for inflation, grew by 3.8% per annum over those five years I have cited earlier.

Even though the pandemic led to the economy contracting by 5.4% in 2020, it rebounded by 7.2% last year. The strong recovery has helped to ensure that resident workers enjoyed real wage growth in 2021, after accounting for inflation. Specifically, we note that in 2021, the real median income growth of full-time employed residents was positive, at 1.1%. For lower-income residents at the bottom 20th percentile, real income rose by a larger 4.6% last year.

Mr Ang Wei Neng asked about the potential impact of inflation on Singapore's economic growth this year. MTI's assessment is that Singapore's economic recovery remains on track, with the GDP expected to grow by 3% to 5% this year. This should continue to support recovery in the labour market in the year ahead.

Second, given the imported and domestic cost pressures, MAS tightened the monetary policy in October last year by shifting the trade-weighted Singapore dollar towards an appreciating path. Since then, the Singapore dollar has strengthened, which will help reduce the Singapore dollar cost of imports and shield Singaporeans from some of the external cost pressures. For instance, the Singapore dollar has appreciated significantly against the currencies of the country's major food sources over the longer term, and this has moderated the pass-through effects of external inflationary pressure.

Third, the Government carefully manages domestic supply-side constraints, such as the supply of industrial and commercial space, to help rein in business rental costs that may translate to higher consumer prices. During the pandemic, businesses received rental relief to cope with their rental costs. Additionally, policy measures, such as the Wage Credit Scheme, Jobs Support Scheme and Jobs Growth Incentive Scheme, have alleviated the labour outlay of businesses.

Fourth, the Government has been diversifying our food import sources and today, our food supplies come from more than 170 countries and regions from the world. This helps to ensure that the prices of our food supplies remain competitive and reduce our vulnerability to larger price fluctuations globally. Notably, while global food commodity prices surged by around 30% on a year-on-year basis between July and November 2021 based on the United Nation's Food and Agriculture Organisation's Food Price Index, Singapore's domestic non-cooked food prices saw a far smaller increase of 1.6% over the same period. MTI and the various Ministries and agencies want to thank our industry partners, including our trade associations and key supermarket retailers who have been working closely with us, especially in the last two years, to diversify and secure alternate food sources for Singapore.

Fifth, the Government works closely with industry partners, including major retailers, to ensure that the prices of daily necessities and food items are competitive and affordable. Mr Saktiandi Supaat asked whether there are further plans to enhance cooperation with retailers this year on daily necessities and food items. Some retailers like NTUC FairPrice have helped to keep the prices of essential items affordable. It has extended its discount schemes for seniors and low-income families by another year to cover the whole of this year, 2022. This is estimated to result in more than S$11 million worth of savings for customers, covering Pioneer Generation and Merdeka Generation seniors, as well as the Community Health Assist Scheme (CHAS) blue cardholders.

Another initiative is the Government's effort to work with the Consumers Association of Singapore (CASE) to onboard more retailers onto its Price Kaki app. The app is for consumers, and it promotes price transparency and helps consumers make informed choices by providing easy and timely comparisons of the prices of groceries and hawker food.

Last but not least, our sixth strategy. The Government provides targeted assistance to lower-income Singaporeans who need support for their basic living expenses through schemes such as the permanent GST Voucher scheme, Service and Conservancy Charges (S&CC) rebates and the Public Transport Vouchers. The Second Minister for Finance will elaborate on these in her response.

Mr Speaker, Sir, let me conclude by assuring Singaporeans and businesses that the Government will spare no effort to keep our economy vibrant as well as to create good jobs and this will help continue to bring real wage growth for Singaporeans to meet their aspirations and their needs in the present, as well as the future.