How do we measure inflation?

Whenever we see news reports on the latest consumer price inflation rate, it often prompts us to compare our personal experiences of recent price changes with what is reported. We might notice that the prices of some items we purchase have increased by more than the official figure, while other items have increased less or even declined. 

The price impact felt by individual consumers can differ, depending on the items that they buy. Take someone who loves durians. When its price rises, he will feel the pinch on his wallet more than his friend who does not eat the fruit! 

While observing changes in the cost of the items you consume frequently might seem like an easy way to gauge inflation, a central bank needs a broader measure of how prices are changing across the entire country. This ensures that monetary policy responds to economy-wide inflation, rather than price changes of specific items.  

The Consumer Price Index (CPI) is widely used to measure inflation. The CPI tracks changes in the price of a fixed basket of goods and services commonly purchased by households. The CPI is intended to reflect the inflation experience of a representative, or average, household in Singapore.

How is the CPI compiled?

Every month, the Department of Statistics Singapore (DOS) compiles the CPI by collating the prices of about 6,800 brands or varieties of goods and services from 4,200 outlets.

This is no easy feat. In addition to scraping data from websites, DOS obtains prices from a range of sources including postal or email queries, electronic returns and administrative data.

Interviewers also fan out across the island every single week to collect prices of perishable food items like seafood, meat and vegetables, which tend to be more volatile and thus have to be surveyed more often.

For some goods and services, prices tend to be more stable. These include service and conservancy charges for HDB flats, utility tariffs, bus or MRT fares, school fees, medical services and household durables. They might be sampled less frequently—say, every month, quarter, or year, or only when the prices change.

Chart on Composition of CPI Basket (2019)

Source of Data: Singapore Department of Statistics  | Find out more

What is the inflation rate that MAS monitors to adjust monetary policy settings?
MAS aims to secure low and stable inflation in the Singapore economy over time. Two key measures of consumer price inflation that MAS watches closely are ‘MAS Core Inflation’ and ‘CPI-All Items inflation’. 

CPI-All Items inflation, also known as headline inflation, refers to changes in the price level of the entire CPI basket. Meanwhile, MAS Core Inflation measures price changes of a subset of goods and service in the CPI basket, excluding accommodation and private road transport.

MAS Core Inflation is seen as a closer gauge of the day-to-day price changes that affect most householdsMAS Core Inflation excludes the costs of accommodation and private transport from CPI All-Items inflation. These items are excluded as they tend to be significantly influenced by supply-side administrative policies and are volatile. A significant share of accommodation costs is the cost of “owner-occupied accommodation”, which is meant to reflect the costs to homeowners of utilising the flow of services provided by their homes over an extended period of time, and is proxied by market rentals. However, this indicator has no direct impact on the monthly cash expenditure of most households in Singapore as they already own their homes. Meanwhile, private road transport costs are significantly influenced by prices of ‘Certificates of Entitlement’ (COEs) determined under the vehicle quota system. Again, the majority of households would not incur such car purchase costs frequently. and is therefore the metric which MAS places the most importance on in its monetary policy deliberations.

MAS also monitors movements in other cost and price factors, such as wages and rentals, import prices, wholesale prices, as well as labour market conditions and inflation expectations. These can shed light on how price levels in the economy will evolve into the future.

Your personal experience of price changes may differ from that of the CPI
While the CPI basket is intended to reflect the inflation experienced by the average household in Singapore, it may be quite different from the actual consumption basket of an individual. This is because every person’s spending pattern is uniquefrom the brands they prefer, to how much of their budget they devote to different types of goods and services. Households that spend more on the items within the CPI basket that have seen a faster pace of price increases would experience a higher personal rate of inflation compared to the official CPI inflation. 

Visit the MAS Gallery to find out how the price of your personal consumption basket has changed over time via an interactive display showing Singapore’s CPI basket of goods and services through the years.

In the next article, we will find out how MAS manages inflation in Singapore.