Staff Papers
Published Date: 01 August 2011

A Review of the Core Inflation Measure for Singapore

MAS Staff Paper No. 51, August 2011 - By Ong Zong Yao David, Soo Cheng Ghee, Choy Keen Meng and Ng Bok Eng


Apart from the headline consumer price index, most central banks around the world are guided by some measure of core inflation in their conduct of monetary policy to ensure price stability. This paper reviews such a measure for Singapore, the MAS Core Inflation, which has been used over the past two decades. Our analyses show that the MAS Core Inflation based on the exclusion approach remains the most appropriate for measuring core inflation in terms of policy accountability, as well as usefulness for policy formulation purposes. The study also reaffirms the strong grounds for excluding the costs of accommodation and private road transport from the core inflation measure in Singapore, as these are volatile and significantly influenced by administrative policies. Moreover, changes in the costs of these two items do not translate into changes in cash expenditures for most Singaporean households, given the high homeownership rate and long intervals between new car purchases for a typical consumer. Empirical tests also establish that the MAS Core Inflation measure fulfils the various criteria of a good core inflation measure — it is less volatile than CPI inflation but co-integrated with it. Further, it is a good measure of trend inflation and a relatively robust predictor of future headline inflation. Hence, the MAS Core Inflation measure continues to be an important indicator of price developments in Singapore that are driven by changes in underlying demand conditions, thereby providing useful information for monetary policymaking.