You will be able to name the main causes of inflation and say which ones MAS policy can and cannot influence.
Farah has three prices she grumbles about. Her rent is going up at renewal. The chicken rice near her office is fifty cents dearer than last year. Her electricity bill jumped for a few months and then settled down again. To her, it is all just "inflation". To an economist, and to MAS, those are three different kinds of price rise with different causes, and only some of them respond to monetary policy.
Telling them apart helps you judge whether a price rise is likely to last, and whether anything MAS does will make a difference to it.
Demand-pull inflation starts with buyers: households, firms and the government together want to spend more than the economy can produce, so sellers find they can raise prices without losing customers.
It tends to show up when the economy is running hot: jobs are plentiful, wages are rising, people are confident, and restaurants have queues. It can also be local to one market. If more people want to rent flats than there are flats available, rents climb even while the rest of the economy is calm, and Farah's renewal letter is that story: more tenants competing for a limited supply of homes.
Monetary policy can lean against demand-pull inflation across the whole economy. A tighter policy, which in Singapore means a faster-rising dollar, cools demand from abroad for Singapore's goods and services and slows the economy a little. It does far less for one market such as rents, which depends mostly on how many homes are built and when leases expire.
Cost-push inflation starts on the seller's side. When the things a business needs get dearer, such as wages, rent for its premises, ingredients or energy, it passes some of that on to the people it sells to.
The chicken rice stall is a good example. The hawker's rice, chicken and cooking oil cost more, the stall rental may have gone up, and an assistant expects a higher wage. None of that is about customers suddenly wanting more chicken rice. It is the cost of making it that rose, and fifty cents on the plate is the stall's response.
A central bank finds this kind harder to deal with, because cooling demand does nothing to the cost of chicken. What policy can do is stop a one-off rise in costs from spreading into everything else.
Singapore buys most of its food and nearly all of its energy from abroad. When global prices of oil, gas, grain or cooking oil rise, those increases flow into the prices Singapore households pay. This is imported inflation, and it is really a form of cost-push that starts outside the country.
Farah's electricity bill is a case of this. Electricity in Singapore is generated mostly from imported natural gas, so when global fuel prices rise, tariffs follow after a delay. When fuel prices fall back, so do tariffs, which is why her bill settled again.
This is where Singapore's choice of policy tool earns its keep. As lesson 1.3, What a stronger or weaker Singapore dollar does to you, showed, a stronger Singapore dollar means each dollar buys more foreign currency, so imports cost fewer Singapore dollars. MAS cannot change the world price of oil, but by letting the dollar strengthen it can offset part of the rise in Singapore dollar terms.
The fourth piece is less visible. Once people come to expect higher prices, they behave in ways that make prices rise.
Workers who expect living costs to rise by several percent next year ask for pay rises to match. Employers who expect their own costs to rise put up prices sooner, before the costs arrive. Landlords who expect rents to keep climbing ask for more at renewal. Each of those decisions feeds the next, and inflation that began as a one-off jump in oil prices can settle into a habit.
This is a big reason central banks act early. Bringing inflation down is much harder once everyone expects it. When a MAS statement mentions inflation expectations or wage growth, this is what it is watching.
Not every price fits neatly into one box. The chicken rice reflects imported ingredients, local wages and rent, all at once. The useful question is which cause does most of the work. If it is imported costs, a stronger dollar and calmer global prices may ease it. If it is local demand or local costs, the rise is more likely to stay. Pick out a few prices from your own spending that have gone up over the past year and think about which story fits each one best.
Pick three prices you pay that have risen in the past year and write which cause of inflation best explains each one.
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