You will be able to explain how the CPI is built and what a year-on-year inflation figure actually compares.
Farah reads on her phone that inflation in Singapore has eased. On the same afternoon her landlord messages to say the rent on her two-room flat will go up when the lease renews, and the chicken rice near her office has gone up by fifty cents. "Eased" does not feel like the right word. Part of the gap is personal, which lesson 3.4 deals with. Part of it is about what the published number actually measures and what it compares, and that is what this lesson is about.
You met the Consumer Price Index in lesson 4.1 of How money works, Inflation means the same dollar buys less each year. Here you look inside it, so that you can read a monthly release and know exactly what each figure means.
The Consumer Price Index, or CPI, is compiled by the Department of Statistics. Each month, its staff collect the prices of a fixed basket of goods and services that resident households buy: food from hawker centres and supermarkets, rent, electricity, bus fares, school fees, clinic visits, clothes, phone plans and a long list more. The same items are priced again and again, so that the index tracks changes in price, not changes in what people choose to buy.
The prices are turned into an index. In a chosen base year the index is set to 100, and every later month is expressed against it. An index of 115 means the basket costs 15% more than it did in the base year. The level on its own is not very interesting. What people report is how it has changed.
Not every price counts equally. Each category in the basket is weighted by its share of household spending. If households spend far more on housing than on clothing, a rise in rents moves the index far more than a rise in the price of shirts.
The weights come from the Household Expenditure Survey, which the Department of Statistics runs every few years to find out what households spend their money on, and they stay fixed until the next survey comes round. If people's habits shift quickly in between, the official weights take a while to catch up.
As lesson 4.3 of How money works, Your personal inflation rate is not the headline number, showed, those weights describe an average household, and nobody's spending looks exactly like that. Farah rents and buys most of her meals outside, so her basket is quite different from a retired couple's in a fully paid flat. The Department of Statistics publishes the weights with the CPI, so you can see how much each category counts.
The number in the headline is almost always year-on-year inflation: this month's index compared with the same month a year earlier.
That choice is deliberate. Prices have seasons. Food prices tend to rise around Chinese New Year, and some travel-related prices climb during school holidays. If you compared February with January, part of any rise would just be the festive season. Comparing February with last February removes most of that seasonal swing, because both months contain the same season.
The release also includes month-on-month changes. Those are useful for spotting a turn early, but they are noisier, and they are easy to misread when quoted without saying which comparison they use. Lesson 7.1, How a headline is built and what it leaves out, comes back to this.
This is the misreading that catches people most often, and it is the one behind Farah's frustration.
Here is an example with made-up index values. Last year the CPI rose from 100 to 104, which is 4% inflation. This year it rose from 104 to 106. Inflation this year is 106 divided by 104, minus one, which is about 1.9%.
The headline would say inflation has eased from 4% to 1.9%, and that is accurate, but the basket still costs more than it did a year ago and 6% more than two years ago. Prices kept climbing, at a gentler pace.
Prices only fall when inflation turns negative, which is called deflation. It is rare, and it is not usually good news, because it tends to come with weak demand and falling wages.
So when you read that inflation has eased, translate it as "prices are still rising, but more slowly than before". Farah's rent and her chicken rice fit perfectly well with that headline.
The Department of Statistics puts the CPI out every month on its website, as a short release with tables by category and the weights behind them. Read it with the questions from this lesson in mind: which month it covers, which comparison the headline uses, and which categories count for most. The last of those shapes how much any single price rise can move the number Farah read on her phone.
Open the latest CPI release from the Department of Statistics and write down the headline year-on-year figure and its three largest category weights.
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