The simplest way to understand what is deflation is to imagine the reverse of inflation. Not long ago, we are surrounded by inflation. From MRT and bus fares to that bowl of wan tan mee, prices keep increasing. Now, the crawls of deflation have taken over. Deflation is characterised by falling prices, slow down in demand for goods, drop in economic activity, rising unemployment, and consumers holding back their purchase as a result of falling wages.
The latest Consumer Price Index (CPI) in May shows a drop of 0.4 per cent compared to April. CPI is a measure of the price of a basket of goods. This may fluctuate if prices become volatile. Core inflation, which strips away transportation and accomodation costs, is a more stable long term measure of CPI. Core inflation in May is 0.1 per cent higher compared to the same period last year. However, there are concerns that the drop in core inflation since 2015 has built up sufficient deflationary pressure on the economy.
To understand what causes the drop in core inflation let us delve further. Falling prices is largely a result of the global fall in oil price. Oil prices dived more than 50 per cent from its peak and this has contributed to lower cost of production, and also trickles down to lower utility bills for the man on the street. Furthermore, the suite of Budget measures introduced by the Government to help households cope with the cost of living adds to the drop in CPI number.
Let’s rewind back to the last time Singapore experienced deflation. It was at the height of the Global Financial Crisis when our economy hit negative growth. This triggled rising unemployment and created substantial caution in consumers behaviour. Comparatively, the latest unemployment rate shows a drop to 1.8 per cent in 1Q2015 compared to 1.9 per cent in thr previous quarter. The robust employment market is reinforced by the government’s effort to slow down foreign employment in Singapore. Though 2Q2015 economic growth dropped by 4.6 per cent quarter on quarter, the government is still looking at 2015 economic growth of between 2 to 4 percent.
With the expected rise in interest rate by the Federal Reserve in later part of 2015, the US economy is on track for healthy growth in 2015. As a major trading partner, Singapore stands to benefit from the economic growth in US. Quoting Trade and Industry Minister Lim Hng Kiangs comment:
“In sum, MTI’s and MAS’ assessment is that the Singapore economy is not experiencing deflation nor is it likely to slip into deflation…”
With a better understanding of current situation, the bout of deflationary pressure may well turn out to be more of disinflation which is a fall in inflation rather than deflation. The current fall in prices could be an opportunity to stretch your dollar too.