State what MAS core inflation leaves out and when each measure is the more useful one.
Farah, who you met in lesson 3.1, "What the consumer price index measures and who publishes it", rents a home. Each month Farah's price news shows two inflation figures side by side, and only one of them comes close to what Farah actually pays.
Singapore's monthly price news usually reports headline inflation and MAS core inflation together. In some months the two figures are close, and in other months they are far apart. Reading the wrong one can leave you with a false picture of the prices you actually pay.
Headline inflation is the year-on-year change in the whole Consumer Price Index (CPI), the index you took apart in lesson 3.1. It covers every category in the CPI basket. MAS core inflation is the same measure with two categories removed: accommodation and private transport. MAS and the Ministry of Trade and Industry publish core inflation every month, together with the headline figure.
Accommodation covers what households pay for housing, such as rent. For owner-occupiers, the index includes an estimate of what their home would cost to rent, an amount they do not actually pay each month. Private transport covers buying and running a car: the car itself, its certificate of entitlement (COE), petrol and other running costs.
These two categories are excluded because their prices are driven mostly by things monetary policy cannot reach. Rents move with the supply of new homes, the number of leases expiring and government housing measures. Car prices swing with the COE premium, and the COE price comes from a bidding process for a quota set by the Land Transport Authority. A stronger Singapore dollar does little to rents or car prices.
In module 1 you saw that MAS manages the exchange rate to keep inflation in check over the medium term. To do this, MAS needs to see underlying price pressure: the part that comes from wages, imported goods, demand across the economy and costs that firms pass on. If MAS steered by headline inflation alone, a jump in COE premiums or a burst of rent rises could push it towards tighter policy, even though a stronger dollar would barely lower those prices. The rest of the economy would then bear the cost of a tighter policy aimed at the wrong target. Removing the two noisy categories lets MAS see the trend it can actually influence. The decision paragraph you read in lesson 1.4, "Translate a MAS policy statement into plain words", usually relies on MAS's view of core inflation.
Households do pay for accommodation and private transport, and for many families these are the two biggest bills. So the measure best suited to setting policy is not always the best measure of a household's cost of living. Headline inflation is generally closer to the experience of households that rent or drive. Core inflation may be closer for a household that owns its home outright and uses the MRT.
Farah rents. When rents climb faster than everything else, headline inflation runs above core, and headline is closer to what Farah faces. Marcus and Grace, whom you met in module 2, live a few kilometres from Farah, own their flat and drive. Rising rents do not change what they pay each month, but a jump in COE premiums or petrol prices does affect them if they replace the car or fill the tank.
A gap between headline and core is a clue worth following up. By construction, any gap can only come from accommodation, private transport, or both, because those are the only differences between the two measures. Say headline inflation is 3.0% and core is 2.0%, invented example figures. The gap is 3.0% minus 2.0%, which is one percentage point, and it has to come from one or both of those categories. To find which, open the category table in the Department of Statistics release and see which of the two rose faster than the rest of the basket.
Suppose private transport is driving the gap, for example through higher COE premiums, and rents are flat. If you are not buying a car this year, the headline overstates your inflation and core is the better guide. If you are about to replace a car, the headline may understate it. When core is above headline, accommodation and private transport rose more slowly than the rest of the basket, or fell. A renter whose lease resets this year should look at the rent figures specifically, because the average may hide what is happening in their area.
Neither measure is right for everyone, so the useful habit is to know which items make up the gap and whether you buy them. Each time a release comes out, work through it in this order:
Look at both the headline and core figures in the latest release. Note the gap between them, which can only come from accommodation, private transport, or both. Open the category table in the Department of Statistics release and check which of those two categories rose faster than the rest of the basket. Ask whether your household buys the items driving the gap: are you buying or replacing a car this year, or does your lease reset this year? Decide which figure describes your household better, and if you rent, check the rent figures specifically rather than relying on the average.
When you sit down with the latest release, look at both figures and the categories behind the difference, and decide which describes your household better.
Look up the latest headline and MAS core inflation figures. Write down which one is closer to your own situation and why.
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