Survey shows cautious optimism leads to drop in inflation expectations

Survey shows cautious optimism leads to drop in inflation expectations

A survey by Mastercard and SMU shows drop in Singapore's inflation expectation

Survey shows cautious optimism leads to drop in inflation expectations

Singapore, 24 April 2012 – Singapore households expect inflation to fall in the next one to five years. The third survey on inflation expectations Index released by MasterCard andSingapore Management University (SMU) shows that Singapore’s inflation expectations dropped in the first quarter of 2012. This may be attributed to more informed consumers and improved optimism towards the global economy.

The SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx) was launched in January 2012. It was developed by Dr Aurobindo Ghosh and Professor Jun Yu from SMU Sim Kee Boon Institute for Financial Economics (SKBI), in collaboration with MasterCard. SInDEx is derived from an online survey designed to help researchers understand the behaviour and sentiments of decision makers in Singapore.

This third SInDEx survey follows two earlier surveys conducted in September and December last year. The third online survey was conducted in March 2012 and it gathered feedback from around 400 individuals from Singapore households. Consumers were asked a variety of demographic and socioeconomic questions. The consumers also shared their views on perceived values of economic variables over the next one to five years.

The March 2012 quarterly survey showed for the current year, the SInDEx1, a composite medium term inflation expectations index which measures inflation expectations over the next one year, was at its lowest at 4.2% since its inception. The Headline inflation expectations (which measures overall inflation expectations for the coming one year) was at 4.13 %, a drop from the 4.7% recorded last December. The March figure is also the lowest since the index was first created in September 2011. The medium term Singapore Core inflation expectations (excluding accommodation and private transportation) also reached a new low of 4.2 % in March.

As for the next five years, SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx5, the composite weighted five-year inflation expectations) also fell from 5.16% to 4.97%. The five-year Headline inflation expectations (which measures overall inflation expectations five years from now) dropped slightly from 5.3% in December to 5.2%. The five-year Singapore Core inflation expectations (excluding accommodation and private transportation) also dropped from 5.09% to 4.8%.

The researchers opined that the slow but steady decline in the annualised inflation expectations five years from now is a reflection of more effective “anchoring” of inflation expectations due to better communication between policy makers, media and the general public, since the SInDEx was launched in January this year.

Some of the factors which might explain the difference between the higher Headline inflation and the lower Core inflation expectations, are the current sentiments arising from higher COE prices and property prices. After the newly instituted cooling measures late last year, Headline inflation expectations arising out of property price has probably come down.

Dr. Aurobindo Ghosh, co-creater of SInDEx and Programme Director at SMU SKBI said “A well anchored long term inflation expectations measure is not expected to fluctuate frequently with short term movements like the upward price pressure coming from commodities like global oil prices or short term market sentiments.”

“Academic research has also indicated that there might be a slight upward bias in the inflation expectations globally due to consumers’ personal experience. As an example, a recent publication from the Conference Board Consumer Research Center showed that even the US inflation expectations for March 2012 was at 6.3%, up from 5.5% in February. This is the highest level reached since May 2011 probably due to higher global oil prices although the US economy is looking more upbeat.

“Given the downward trend in the Singapore Inflation Expectations Index, albeit nascent, we are cautiously optimistic that the public’s perception on inflation expectations is a good reflection of a more positive IMF World Economic Outlook (WEO, April 2012),” Dr. Ghosh added.

Dr. Yuwa Hedrick-Wong, global economic advisor, MasterCard Worldwide, said, “Cautious optimism is the catch cry of 2012 as economies continue to slowly recover from the financial crisis. In this connection, a moderation in the reading of inflation expectations for Singapore supports the case for optimism. Everything else being equal, a continuation of this trend could gradually lead to a more competitive exchange rate of the Singapore dollar, hence Singapore exports. This will in turn support a stronger economic performance of Singapore in a global economy that is still facing serious challenges and weighed down by uncertainty.”

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