Negative inflation in S'pore does not mean deflation

A negative inflation rate should not be equated with deflation. This has been said before but is worth reiterating, now that Singapore has reported its sixth month of negative inflation in a row.

Official statistics on Monday showed that the consumer price index (CPI) fell 0.5 per cent year-on-year in April - sending inflation in the opposite direction from what economists were expecting. Their median forecast was for zero per cent inflation, up from an inflation rate of -0.3 per cent in March.

It's easy to dramatise the figures. On top of half a year of sub-zero inflation, April's core inflation also fell under one per cent for the first time in about five years. Core inflation - which gives a better idea of the underlying price level and in Singapore's case excludes volatile accommodation and private road transport costs - slipped to 0.4 per cent in April, from one per cent in March.

But authorities and economists alike have avoided using the word "deflation" to describe what is happening with Singapore's price levels. And rightly so, because Singapore is nowhere near experiencing damaging deflation, à la Japan. True, negative inflation appears to have persisted for longer than usual and could even extend to a year if Singapore's central bank and Ministry of Trade and Industry (MTI) are right about the CPI picking up only towards the end of this year.

A persistent decline in prices is a key characteristic of deflation. But deflation only gets dangerous when consumers postpone buying decisions because they assume that goods and services will be cheaper in the future than they are today. Or, when businesses choose to hold back on investing as they believe costs will be lower if they wait. Such a situation would inevitably show up as an across-the-board drop in prices - which has not been the case with Singapore's CPI over the last six months.

Apart from falling car prices and housing rentals, much of the drop has stemmed from lower costs of petrol and electricity tariffs, thanks to last year's plunge in global oil prices. Medical subsidies and the waiver of national examination fees have dampened inflation further. Also, if consumers and businesses put off spending, demand would also weaken significantly. But in Singapore, the economy continues to expand. On Tuesday, MTI revised its earlier Q1 GDP estimate of 2.1 per cent year-on-year growth up a notch on Tuesday, to 2.6 per cent.

Evidence of deflation is therefore flimsy. In fact, business owners may continue to feel cost pressures, as the tight labour market pushes wages higher. While not as much of this will be passed on to consumers since growth remains moderate, MTI and the Monetary Authority of Singapore (MAS) did, in their comments on the latest inflation report, make the point that such underlying pressures remain.

It is worth noting that Singapore is not the only economy whose inflation rate has fallen below zero. The UK's negative inflation rate in April, its first since 1960, prompted similar discussions. Its Chancellor stated that it should not be mistaken for damaging deflation.

The same cannot be said for the euro zone yet, even though its spell of sub-zero inflation has just been broken with the region reporting no inflation for April. There, negative inflation has accompanied growth stagnation, so fears of deflation are legitimate.

Economists such as HSBC's Frederic Neumann have warned that tumbling inflation across Asia should not be shrugged off as merely due to oil prices, and needs to be fought off with reforms.

Here in Singapore, economists - twice surprised this year by the central bank's move in January and lack of action in April - are now saying that "hurdle for policy easing" remains high. But with inflation now negative, should growth take a turn for the worse, the MAS should consider shifting from its current stance of allowing appreciation in the trade-weighted Singapore dollar, to a neutral or even depreciation bias.