Inflation in Singapore has generally been low, with headline inflation averaging 1.8 percent over the last four decades (1981–2021).

However, 2022 was one of the years that bucked the trend. Consumer prices in Singapore went up by 6.1 percent in 2022 compared to the previous year, the fastest rate of increase since 2008. Meanwhile, MAS Core Inflation—which excludes private road transport and accommodation costs from headline inflation and is seen as a better gauge of the day-to-day price changes that affect most households—reached 4.1 percent in 2022.

The dramatic rise in inflation was driven by several shocks to demand and supply in the global and Singapore economies. Let's take a closer look at these factors.

Strong demand and constrained supply in the global economy
When the COVID-19 pandemic broke out in 2020, many countries imposed movement restrictions to contain the spread of the virus. People also cut back on high-contact activities to protect themselves from the virus. As a result, demand, particularly for services, declined sharply, and consumer prices fell.

Many households accumulated substantial savings during this period. Workers who were able to work remotely continued to earn incomes and many governments provided generous financial support to households, but people were unable to spend as much due to the restrictions in their economies. Spending on non-essential services, such as dining out and international travel, fell sharply. 

Once COVID-19 vaccines became available, countries were able to re-open their economies over the course of 2021. Demand rebounded strongly, as people spent on goods and services that they had been unable to purchase during the worst of the pandemic. The unleashing of this “pent-up” demand meant that businesses could raise their prices, creating demand-pull inflation.

While demand was recovering strongly, supply did not keep up. Pandemic-related restrictions had to be re-imposed from time to time in many countries to contain new infection waves. As a result, operations at factories, ports, and stores continued to be disrupted. This affected logistics, transportation, and production supply chains across the world, resulting in delays and shortages.

Due to strong demand and constrained supply, prices of global food and energy commodities, as well as for goods and services produced in many economies, began rising quickly from the second half of 2021.

The outbreak of the Russia-Ukraine war in February 2022 added to these inflationary pressures. The two countries are major suppliers of key commodities such as oil and gas, as well as fertiliser, wheat, and edible oils. The war disrupted their supply and generated considerable uncertainty, causing commodity prices to spike and contributing to cost-push inflation.

For instance, higher energy prices drove up electricity and transport costs for consumers and businesses globally, including in Singapore. The cost of Singapore’s food imports also went up. Higher grain prices meant that bread became more expensive to produce, leading producers to increase bread prices. As grains are also used in animal feed, the price of meat increased as well. For example, in Malaysia—an important source of food imports for Singapore—farmers cut back on their supply of chicken and vegetables due to rising costs.


Higher global prices drove up Singapore's import costs
The demand-supply imbalances in the global economy had a significant impact on Singapore, a very open economy that is highly reliant on imported goods and services.

For example, natural gas used to generate electricity, food such as raw fruits and vegetables, as well as travel services, which collectively comprise a significant share of Singapore's consumer price basket, are largely imported. In fact, more than 90 percent of Singapore’s food is imported . Singapore is therefore very sensitive to changes in the global prices of goods and services.

As global commodity prices and inflation in our trading partners rose in late 2021 and over the first half of 2022, the prices of Singapore’s imports also increased. Key inputs like energy and raw food, that go into the production of goods and services sold in Singapore, became much more expensive. This drove up cost-push inflation.

Strong demand recovery in Singapore, but still constrained supply
Similar to the global situation, demand in Singapore grew strongly as the impact of the pandemic waned. The Singapore economy staged a robust rebound in 2021, expanding by 8.9 percent after the 3.9 percent contraction in 2020.  

As safe management measures and other restrictions were gradually eased over 2021 and into 2022, Singaporeans were eager to resume shopping and dining out in larger groups. Households were able to draw on the savings they accumulated during the pandemic.  

At the same time, many businesses had not yet returned to operating at the same level as they did before the pandemic. Companies which had let go of workers during the pandemic needed time to hire again. This was particularly challenging in sectors heavily reliant on foreign workers, as many of these employees had gone back to their home countries, while border restrictions prevented new workers from arriving quickly.

As a result, wages rose in almost all sectors due to strong demand for workers amid these labour shortages. While this was good for workers, it added to the rising costs faced by businesses.

Indeed, businesses costs rose more quickly in 2022 compared to the pre-pandemic period. With consumer demand still strong, firms were able to pass on these rapidly rising costs to their customers by increasing the prices of their goods and services across the economy. The combination of demand-pull and cost-push factors led to high inflation.


Managing inflation
In sum, following the COVID-19 pandemic, both demand-pull as well as cost-push pressures contributed to higher inflation all over the world, including in Singapore.

In response to rising inflation, MAS tightened policy five consecutive times starting in October 2021, including two unscheduled Monetary Policy Statements.

The key mandate of central banks, including MAS, is to ensure that inflation remains low and stable. In periods where there are many factors at play such as the pandemic and its aftermath, it is certainly not a straightforward task.