How has inflation evolved in Singapore?
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Inflation in Singapore has seen many ups and downs. Our past inflation experience can be broadly divided into seven periods.
1971–1980: The tumultuous seventies
During the 1970s, Singapore experienced high and volatile inflation, driven by the global oil crises of 1973 and 1979. MAS was established in January 1971 with the responsibility to ensure monetary and price stability in Singapore.
In October 1973, global oil prices quadrupled after the Organisation of the Petroleum Exporting Countries (OPEC) imposed an embargo against the United States. Higher global oil prices led to cost-push inflation, driving Singapore’s headline inflation to as high as 30 percent in the first half of 1974, compared to the same period the year before.
MAS implemented many different kinds of monetary tightening measures, including requiring banks to hold more reserves with MAS and hiking interest rates. However, these policies could not bring inflation down sufficiently. It was only when global growth slowed and the oil price shock faded, that inflation in Singapore came down to 2.6 percent in 1975.
MAS studied other monetary policy tools that might be better suited to dealing with imported inflation shocks. By 1975, MAS had begun to monitor the level of the Singapore dollar nominal effective exchange rate (S$NEER) within a band.
In the late 1970s, the global economy was roiled by a second oil price shock, which again caused Singapore’s headline inflation to surge. This time it peaked close to 10 percent in the last quarter of 1980.
1981–1987: MAS adopted an exchange rate-centred policy framework
Inflation was much less volatile in this period. It was high in the early 1980s, averaging 8.4 percent over 1980-81, due to the effects of the second oil shock. However, on average, prices grew at a moderate pace of about 2 percent per annum over the full period of 1981-87, from close to 7 percent per annum in the 1970s.
This moderation in inflation was mainly due to two factors.
First, MAS officially adopted an exchange rate-centred monetary policy framework in 1981. MAS set the S$NEER on a stronger appreciation path: from 1981 to 1985, the S$NEER appreciated by 22 percent. This helped to filter the high inflation rates in many of Singapore’s major trading partners, dampening their impact on Singapore’s inflation.
Second, a slowdown in the world economy occurred in 1985, driving Singapore into its first post-Independence recession that year. Global oil prices also collapsed in 1986 due to weak demand and excess supply in oil markets.
In 1986, headline inflation briefly turned negative, reflecting weak aggregate demand overseas and in Singapore. In response, MAS eased monetary policy.
1988–1996: The boom years
Inflation remained steady over this period even as Singapore experienced strong and sustained economic growth.
Real GDP growth in Singapore averaged 9.1 percent during these boom years, from 6.7 percent in the previous period. At the same time, the unemployment rate fell to an average of 1.8 percent, significantly lower than in the early 1980s.
Reflecting these firm economic conditions, Singapore’s headline inflation averaged 2.4 percent per annum, slightly higher than 2.2 percent in the previous period.
MAS allowed the Singapore dollar to appreciate steadily strong growth years, which helped keep a lid on overall domestic inflationary pressures.
1997–2003: The crisis years
From 1997 to 2003, Singapore experienced a series of negative shocks: the Asian Financial Crisis in 1997, the 2001 IT downturn, and the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003.
A weakened economy and high unemployment rates weighed on demand and thus consumer prices.
As a result, headline inflation remained low, averaging 0.6 per annum percent over this period and MAS eased monetary policy.
2004–2009: The run-up to the Global Financial Crisis (GFC)
Inflation rose rapidly over this period, from the headline inflation rate increasing from 1.7 percent in 2004 to a peak of 6.6 percent in 2008.
As the economy rebounded from the shocks in the previous years, inflationary pressures began to build up moderately. MAS therefore set the exchange rate on a modest and gradual appreciation path, with policy settings unchanged over 2004–06. This was in line with headline inflation that was, on average, low at 1.0 percent over these three years.
However, Singapore’s inflation picked up rapidly over 2007 and 2008. This was partly driven by rising global commodity prices, due to strong global economic activity. The Singapore economy also grew firmly alongside its trading partners. Rising wage and rental costs were passed through to consumer prices. A 2%-point GST hike in mid-2007 added temporarily to inflation. In response to the step up in inflation, MAS tightened monetary policy.
The Global Financial Crisis was clearly underway by the later part of 2008, triggered by the collapse of American financial services firm Lehman Brothers in September. Inflationary pressures quickly eased and MAS set the exchange rate on a zero percent appreciation path in October 2008. The global economy experienced a severe global recession in 2009, as did Singapore. Domestic inflation fell to 0.6 percent that year.
2010–2014: Firm inflation after the GFC
Inflation picked up as the Singapore economy staged a robust recovery from the GFC. Headline inflation averaged 3.2 percent per annum over 2010-14, while MAS Core Inflation averaged 2 percent.
The strong recovery in the global and Singapore economies led to demand-pull inflation. At the same time, cost-push pressures emerged as the government tightened its foreign worker policies, leading to higher labour costs.
Amid firm inflationary pressures, MAS tightened monetary policy and kept the exchange rate on a gradual appreciation path.
2015–2020: Slower growth and a pandemic
Inflation slowed in this period as GDP growth was muted. Core inflation averaged 1.1 percent per annum over 2015-19.
By late 2014, global commodity prices, especially oil, fell. Global growth weakened, but OPEC was supplying more crude oil to the market. Inflation in Singapore declined in tandem, and MAS eased monetary policy, setting the slope of the policy band at 0% in April 2016. When the economy had stabilised, MAS increased the slope of the policy band slightly in April and October 2018.
However, fresh shocks hit. In 2019, trade tensions intensified between the major economies. In January 2020, the COVID-19 virus came to our shores. The pandemic pushed many economies, including Singapore, into severe recessions. Declining demand led to weakening inflation globally: in Singapore, core inflation turned negative at −0.2 percent in 2020. MAS eased monetary policy, by recentring the mid-point of the policy band down and setting its slope to 0% in April 2020.