Forum Letter Reply to The Straits Times: Measuring cost-of-living changes

THE article ("Poorest households hardest hit by inflation", Feb 6) noted that if imputed rentals on owner-occupied accommodation (OOA) are excluded from the Consumer Price Index (CPI), inflation for lower-income households last year would be lower than that for other groups.

However, the article also cited views that "CPI-All Items" provides a better picture of cost-of-living changes than the measure excluding imputed rentals on OOA, since rentals and mortgages are significant expenditures. Allow us to clarify.

First, rentals paid by tenants are separate from imputed rentals on OOA, and are fully reflected in both the CPI indices.

Second, imputed rentals are not a good reflection of mortgage payments. As housing market cycles and interest rate cycles can differ significantly, the trend in imputed rentals often deviates from that in mortgage payments. For example, while rental costs have increased, mortgage interest rates have remained low in recent years.

The measurement of the cost of OOA is internationally recognised as the most difficult aspect of measuring CPI.

While measuring accommodation costs of rented homes is straightforward, home owners do not pay rent and, thus, their housing consumption is unobserved.

To address this, statisticians have developed several methods to measure the cost of OOA. Each has its pros and cons.

Singapore uses market rentals of similar homes as a proxy for the costs of OOA.

However, because our rental market has seen significant fluctuations, the methodology results in a highly cyclical CPI. The fluctuations in imputed rentals do not reflect the actual expenditure of owner-occupiers, who in Singapore comprise the large majority of households.

This is why the Department of Statistics also compiles the alternate measure of "CPI less imputed rentals on OOA", which relates more directly to households' actual cash spending.

Several other countries do likewise. In Britain, the CPI excludes OOA, while the Retail Prices Index includes it. Some other European countries exclude OOA altogether from the CPI.

An alternative measure of OOA is based on mortgage payments. However, mortgage payments reflect both the investment value of a home and its consumption cost.

Separating the investment component, which is not part of the CPI, from the cost of consumption is a difficult matter, involving onerous data requirements. Few countries have chosen this approach.

We are continuing to review the measurement of OOA in the light of these considerations, including possible ways to minimise the cyclical component of imputed rentals that has no bearing on actual expenditures. 

Mrs Cindy Keng
Director, Corporate Communications Division
Ministry of Trade and Industry