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One-year-Ahead headline inflation expectations elevated to 11-year high of 4.6%: DBS, SMU

Bryan Wu
Bryan Wu10/17/2022 12:02 PM GMT+08  • 5 min read
One-year-Ahead headline inflation expectations elevated to 11-year high of 4.6%: DBS, SMU
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The One-year-Ahead headline inflation is expected to hit 4.6% in September due to heightened global uncertainty, compared to 3.9% in June — the highest recorded One-year-Ahead inflation expectations since December 2011 when it polled at 4.6%.

As anticipated, the survey result from the 45th edition of the Singapore Index of Inflation Expectations (SInDEx) is higher than the historical third-quarter average reading of 3.18% from 2012 to 2021.

The quarterly SInDEx puts less weight on more volatile components like accommodation, private road transport and food and energy-related expenses. It surveys some 500 individuals representing a cross-section of Singaporean households, which helps researchers try to understand the behaviour and sentiments of Singaporeans.

The survey is led by principal investigator Dr. Aurobindo Ghosh, assistant professor of finance (education), Lee Kong Chian School of Business at the Singapore Management University (SMU).

DBS Group Research is a co-sponsor and research partner with the Sim Kee Boon Institute for Financial Economics (SKBI) at SMU.

In a statement dated Oct 17, DBS says researchers took a more forward-looking approach to analyse the impact of global economic developments on Singapore’s economic growth and inflation.

See also: Analysts expect to see 'challenging' core inflation in 2023, further tightening cannot be 'ruled out'

“Overall, despite policy stabilisation to alleviate the impact of the pandemic and its aftermath, given the global uncertainty and economic disruptions, Singaporean consumers felt that the pandemic will have a moderately negative impact on Singapore’s economic growth,” says DBS.

According to the statement, consumers were asked what they feel is the main reason for the general increase in prices starting in September. About 29.7% of consumers believe this is due to the impact of the ongoing Russia-Ukraine conflict, followed closely by 23.7% who attribute this to supply chain disruptions and 23.5% to the impact of Covid-19 easing measures.

Singaporean consumers also felt they will have to fork out slightly higher amounts on spending owing mainly to price increases despite possible cutbacks on consumption. “We found that the impact of the latest domestic and global developments on inflation expectations for Food, Transport, Housing and Utilities to be slightly negative towards increasing inflation,” notes DBS.

See also: Analysts anticipate further slowdown of NODX in 1H2023 after underperformance in 2H2022, divided on full-year forecasts

It adds that the impact of the latest domestic and global developments on overall One-year-Ahead inflation and Five-year-Ahead inflation expectations was found to be negative but limited towards increasing inflation.

However, DBS also points out that there was “some divergence” among respondents regarding the impact on inflation expectations for certain components including food, clothing and footwear, and overall inflation expectations. Survey results found a distinct bimodal distribution, which means there are two large groups who disagree whether the impact would be positive or negative — reflecting the global uncertainty.

Says Dr. Ghosh: “SInDEx findings seem to be tracking the global outlook of uncertainty where Singaporean consumers expect a slight negative impact on growth, while overall inflation expectations have heightened since our last survey in June 2022. Both medium-term headline and core inflation expectations are the highest they have polled since December of 2011, nearly 11 years ago. In summary, we find that component-based inflation expectations show continued and persistently high values for food, transportation, housing and utilities.”

Benchmark comparison

In comparison to the SInDEx findings, data from the Monetary Authority of Singapore’s survey of professional forecasters (MAS SPF) released in September showed that the median forecasts of consumer price inflation (CPI) All Items inflation for 2023 was 3.5% and MAS Core Inflation was 3.1%.

The latest CPI data release from the Department of Statistics (SingStat) showed that CPI-All Items rose by 5.7% from January to August, compared to the same period in 2021, with the latest August 2022 monthly inflation print coming in at 7.5% y-o-y.

On Oct 14, MAS further tightened monetary policy by re-centering the mid-point of the S$ nominal effective exchange rate (S$NEER) policy band up to its prevailing level, the fifth consecutive tightening move since October 2021.

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“The October policy move, together with the previous monetary policy tightening moves, aims to slow the momentum of inflation and ensure medium-term price stability,” says DBS.

Meanwhile, the SInDEx’s overall CPIEx Inflation Expectations, after adjusting for potential component-wise behavioural biases and re-combining across components, slightly increased to 5.7% in September from 5.5% in June.

Inflation expectations of all individual components remained unchanged compared to the June 2022 survey at 5.0%, except the inflation expectations for food increased to 6% in September 2022 survey from 5% in the June 2022 survey and that of transportation remained unchanged at 8.0% from the June 2022 survey.

“We also observed that the free response overall inflation expectations after accommodating for potential behavioural biases increased to 6% in September 2022 compared to 5.0% in June 2022. Consumer response-based surveys are susceptible to various behavioural biases unlike surveys given to professional economists like the MAS SPF who have more access to relevant and current information and research,” explains DBS.

To reduce the impact of such biases, the SInDEx survey provides some current and relevant aggregated information in the survey questionnaire developed by researchers at SMU and partners under the supervision of Dr. Ghosh.

Looking forward

For the longer horizon, the Five-year-Ahead CPIEx inflation expectations increased to 4.7% in the September 2022 survey from 4.5% in June 2022. The current polled number is higher than the third quarter average of 3.9% since the survey’s inception in 2012 to 2021.

The Five-year-Ahead CPIEx core inflation expectations, excluding accommodation and private road transportation related costs, also increased to 4.7% in September from 4.3% in June.

Overall, the composite Five-year-Ahead SInDEx5 also rose to 4.7% in September from 4.4% in June. In comparison, the third-quarter average value from 2012 to 2021 of the composite Five-year-Ahead SInDEx5 is 3.8%.

“The long term Five-year-Ahead inflation expectations have not increased as rapidly as the medium-term inflation expectations raising the hope of more anchored or grounded inflation expectations. There is more stabilisation in the life vs livelihood debate where for every person choosing life over livelihood, about four choose livelihood over life, higher compared to the June 2022 survey,” Dr. Ghosh comments.

“This is signalling that we have approached a new normal of endemic Covid-19 and most advanced economies including Singapore are on a similar path to pursue non-inflationary growth despite challenging global macroeconomic conditions,” he adds.

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