You will be able to say what MAS core inflation excludes and when each measure is the more useful one.
Read the monthly news on prices in Singapore and you will usually see two inflation numbers side by side. One is called headline inflation, the other MAS core inflation, and some months they are close while in others they sit well apart. A reader who picks the wrong one can come away thinking prices are behaving very differently from what they are paying.
This lesson explains what separates the two figures, why MAS pays most attention to one of them, and how to decide which is closer to your own life.
Headline inflation is the year-on-year change in the whole Consumer Price Index, the one you took apart in lesson 3.1, What the consumer price index measures and who publishes it. Every category in the basket is in it.
MAS core inflation is the same measure with two categories taken out: accommodation and private transport. MAS and the Ministry of Trade and Industry publish it each month alongside the headline figure.
Accommodation covers what households pay for housing, such as rent. For people who own their home, the index includes an estimate of what the home would cost to rent, which they do not actually pay out each month. Private transport covers the cost of buying and running a car: the car itself, its certificate of entitlement, petrol and the other costs of running it.
Those two were chosen for a reason. Their prices are driven largely by things monetary policy cannot reach. Rents move with the supply of new homes, the number of leases expiring and the government's housing measures. Car prices swing with the certificate of entitlement, whose price comes from a bidding process for a quota set by the Land Transport Authority. A stronger Singapore dollar does little to either.
MAS manages the exchange rate to keep inflation in check over the medium term, as you saw in module 1. To do that well it needs to see the underlying pressure on prices: the part that comes from wages, imported goods, demand across the economy and the 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 do almost nothing to bring those prices down. The rest of the economy would carry the cost of a tighter policy aimed at the wrong target. Core inflation strips out those two noisy categories so MAS can see the trend it can actually influence. That is why the decision paragraph of a MAS statement, which you read in lesson 1.4, Translate a MAS policy statement into plain words, usually leans on its view of core inflation.
The catch is that households do pay for accommodation and private transport. For many families they are the two biggest bills. So the measure that is best for setting policy is not always the best measure of your cost of living.
Think of Farah, from lesson 3.1. She rents. If rents are climbing faster than everything else, headline inflation will run above core, and the headline is closer to what she faces. A few kilometres away, Marcus and Grace from module 2 own their flat and drive. Rents rising do not change what they pay out each month, but a jump in COE premiums or petrol prices does, if they replace the car or fill the tank.
So headline inflation is generally closer for households that rent or drive, and core may be closer for a household that owns its home outright and takes the MRT.
A gap between the two figures is a clue, and it is worth following up.
Here is an example with made-up figures. Headline inflation is 3.0% and core is 2.0%. The gap is one percentage point, and by construction it can only come from accommodation, private transport, or both, since those are the only differences between the two measures. Open the category table in the Department of Statistics release and check which of the two rose faster than the rest.
Suppose the table shows private transport prices rising sharply because of higher COE premiums, while rents are flat. Then ask: am I buying a car this year? If not, the headline overstates what you are facing, and core is the better guide. If you are about to replace a car, the headline might even understate it.
Now flip the example. Core is running above headline. That means accommodation and private transport rose more slowly than the rest of the basket, or fell. A renter on a lease that resets this year would be right to look at the rent figures specifically, since the average may hide what is happening in her area.
Neither measure is the right one for everyone. The useful habit is to know which items make up the gap and whether you buy them. 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.
Compare the latest headline and MAS core inflation figures and write which one is closer to your own situation and why.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).