Forum Letter Reply to The Straits Times: The Dollars and Sense of Inflation

CLARIFICATIONS ON MR AARON LOW’S INFLATION COMMENTARY (1 Feb 2012)

Mr. Aaron Low in his commentary, "The dollars and sense of inflation" (1 Feb 12) implied that the recent Consumer Price Index (CPI) report, with its new indicator, did not provide  a full picture of the impact of price increases on the low-income group. We would like to clarify four points.

First, Mr. Low had assumed that housing rents paid by the low-income group for subsidized housing was excluded from the recently released indicator – "CPI less imputed rentals on owner-occupied accommodation (OOA)".  On the contrary, housing rents are in fact captured in the new indicator under the component "rented accommodation".

The new indicator is intended to provide an additional measure of changes in consumer prices.  It excludes imputed rentals on OOA, which is the notional amount a homeowner has to pay if he was a tenant of his home, as this has no impact on the cash expenditures of households.  

Second, Mr. Low suggested using mortgage payments to reflect the cost of housing. The CPI is meant to measure the change in prices of a fixed basket of goods and services, and is meant to only cover consumption expenditure.  Expenditures on capital assets, such as housing mortgage payments, carry an investment component which should not be included in the CPI. In Singapore’s context, the investment component in mortgage payments is significant. DOS adopts the rental equivalence method to reflect the consumption aspect of OOA.  This is an internationally accepted method recommended by the International Labour Organisation.

Third, according to Mr. Low, higher COE premiums could still result in higher transport costs for households that do not own cars, through increases in taxi fares. Taxi fares are captured under the public transport category in the CPI, and MAS Core Inflation. As such, to the extent that higher COE premiums lead to higher taxi fares, the increase would be reflected in the CPI.

Finally, Mr. Low referred to income data released by MOM to draw inferences on the impact of inflation on the low-income group. DOS' CPI breakdown for different income groups is at the household level, while MOM’s income data is at the individual workers' level. It is therefore more appropriate to compare CPI by household types to household income data rather than referencing them to individual workers' data.

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