When planning for your finances, knowing the average inflation rate is important for multiple reasons.
Not only does it enable you to evaluate whether your investments are beating inflation, it also allows you to project the future cost of your retirement needs or your children’s tertiary education.
How much has the general cost of living increased over the years? And what’s the average inflation rate in Singapore?
Today, we’ll take a deeper look.
Read on!
In a Nutshell
| Average Headline Inflation Rate (CPI All-Items) | Average Core Inflation Rate (MAS Core Inflation) | |
| Over the last 10 years (2010 to 2020) | 1.34% | 1.38% |
| Over the last 20 years (2000 to 2020) | 1.48% | 1.52% |
| Over the last 30 years (1990 to 2020) | 1.56% | 1.60% |
Read on for further details..
What Is Inflation?
Inflation is the rise in the cost of goods and services over time.
While inflation happens most of the time in Singapore, negative inflation, or deflation, can happen too when the general level of prices fall.
According to the Monetary Authority of Singapore (MAS), low and stable inflation is thought to be a core component for long-term sustainable economic growth. The MAS also states that extreme rates of inflation, whether too high or too low, are unfavourable for the economy.
What Is the Consumer Price Index (CPI)?
A key indicator of inflation is the Consumer Price Index (CPI), which measures the change in prices over time of a fixed basket of goods and services typically consumed by resident households.
The CPI data are compiled by the Singapore Department of Statistics.
There are 10 main categories that are tracked:
- Food
- Transport
- Clothing & Footwear
- Communication
- Housing & Utilities
- Recreation & Culture
- Household Durables & Services
- Education
- Healthcare
- Miscellaneous Goods & Services
These categories are further broken down into subcategories.
This fixed basket that is used in the CPI tracks the prices of around 6,800 brands/varieties from 4,200 outlets. How are these prices collected? The data are obtained from various methods:
- Postal enquiries
- Email enquiries
- Electronic returns
- Web scraping data from relevant websites
- Administrative data
- Field interviewers
And because all goods and services are not equally important, a CPI weightage is applied.
2 Ways to Measure Inflation in Singapore
To measure the inflation of a specific area (e.g., cost of healthcare), you’d simply look at the CPI for that category.
Then, we’re able to get the rate of inflation for different categories such as education or healthcare.
However, in order to measure the “general” inflation, two main types of measures are used.
1) CPI All-Items (headline inflation)
2) MAS Core Inflation (core inflation)
What’s the difference between headline inflation and core inflation?
Basically, the CPI All-Items factors in all 10 categories, and the MAS Core Inflation is the CPI All-Items excluding the components of “Accommodation” and “Private Transport”, which belong to the main categories of “Housing & Utilities” and “Transport”, respectively.
The reason why those two components are excluded from the MAS Core Inflation is because they go through short-term fluctuations and don’t form the everyday expenses of most households in Singapore.
In short, while both the headline and core inflation measures can diverge (move away) in the short run, they tend to converge (move together) in the long run.
We should always look at both measures as they tell different tales.
For example, what can we infer if the headline inflation rises by 1% while the core inflation increases by 8%?
If we look solely at the headline inflation, we may simply assume that the costs of goods and services aren’t rising that much. However, when we factor in the core inflation (which removes the influence of the bigger ticket items of accommodation and private transport), we can come to the conclusion that everyday expenses consumed by most households have increased significantly.
How to Calculate the Inflation Rate?
The inflation rate is the percentage increase (or decrease) in the general level of prices over a specified time, usually expressed yearly and sometimes monthly. It can also be expressed over a longer period of time (e.g., over 10 years from 2010 to 2020).
Here’s the formula to calculate the yearly inflation rate:
Inflation Rate = ((CPI of current year) – (CPI of previous year)) / (CPI of previous year) * 100
The Inflation Rate by Year (Singapore)
As the CPI All-Items (headline) and MAS Core Inflation (core) are commonly used, here are the inflation rates for both of them (from 1990 to 2020).
CPI All-Items (headline)
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
| CPI All-Items | 62.743 | 64.901 | 66.357 | 67.878 | 69.978 | 71.185 | 72.167 | 73.627 | 73.428 | 73.445 | 74.435 | 75.19 | 74.896 | 75.261 | 76.518 | 76.877 | 77.617 | 79.251 | 84.504 | 85.008 | 87.408 | 91.995 | 96.205 | 98.474 | 99.483 | 98.963 | 98.436 | 99.004 | 99.438 | 100 | 99.818 |
| Headline Inflation Rate (%) | 3.5 | 3.4 | 2.2 | 2.3 | 3.1 | 1.7 | 1.4 | 2.0 | -0.3 | 0.0 | 1.3 | 1.0 | -0.4 | 0.5 | 1.7 | 0.5 | 1.0 | 2.1 | 6.6 | 0.6 | 2.8 | 5.2 | 4.6 | 2.4 | 1.0 | -0.5 | -0.5 | 0.6 | 0.4 | 0.6 | -0.2 |
The headline inflation rate in 2020 was -0.2%. Over a period of 30 years from 1990 to 2020, the highest inflation in a year was 6.6% in 2008, while the lowest was -0.5% in 2015 and 2016. Since 2000 to 2020, the CPI All-Items has increased 34.1%.
MAS Core Inflation (core)
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
| MAS Core Inflation | 62.094 | 64.359 | 65.398 | 66.562 | 68.247 | 69.744 | 70.998 | 72.092 | 72.377 | 72.737 | 73.818 | 74.965 | 74.927 | 75.632 | 77.136 | 78.105 | 79.445 | 81.195 | 85.803 | 85.783 | 87.084 | 88.971 | 91.239 | 92.8 | 94.608 | 95.076 | 95.934 | 97.327 | 98.967 | 100 | 99.845 |
| Core Inflation Rate (%) | 2.3 | 3.6 | 1.6 | 1.8 | 2.5 | 2.2 | 1.8 | 1.5 | 0.4 | 0.5 | 1.5 | 1.6 | -0.1 | 0.9 | 2.0 | 1.3 | 1.7 | 2.2 | 5.7 | 0.0 | 1.5 | 2.2 | 2.5 | 1.7 | 1.9 | 0.5 | 0.9 | 1.5 | 1.7 | 1.0 | -0.2 |
The core inflation rate in 2020 was -0.2%. Over a period of 30 years from 1990 to 2020, the highest annual inflation was 5.7% in 2008, while the lowest was -0.2% in 2020.
From 2000 to 2020, the MAS Core Inflation rose 35.3%. Hypothetically, this would also mean that over a period of 20 years, a $10 basket of regular day-to-day expenses in 2000 would cost $13.53 in 2020.
If we were to combine both graphs of the CPI All-Items and the MAS Core Inflation together, here’s what it’ll look like:
What Is the Average Annual Inflation Rate in Singapore?
In financial planning, one of the most common applications for an average annual inflation rate is the ability to project future costs.
It is essential to do so because you can’t just take your current level of expenses and expect it to be the same decades later; costs will rise.
Using a constant average rate of inflation – though it may not be reflective of actual price increases – provides simplicity in planning since inflation rates fluctuate all the time.
In order to calculate the average, you can’t just take the sum of the annual inflation rates over a period and divide it by the number of years.
Instead, this formula should be used: PV (1+r)^n = FV
Where
r = the compound average annual rate of inflation
n = the number of years
PV = the CPI for the 1st Year
FV = the CPI for the 2nd Year
(We can use a financial calculator for this.)
And here are the average annual inflation rates in Singapore:
| Average Headline Inflation Rate (CPI All-Items) | Average Core Inflation Rate (MAS Core Inflation) | |
| Over the last 10 years (2010 to 2020) | 1.34% | 1.38% |
| Over the last 20 years (2000 to 2020) | 1.48% | 1.52% |
| Over the last 30 years (1990 to 2020) | 1.56% | 1.60% |
Why Is Singapore’s Inflation Rate So Low?
When you look at the average yearly inflation rates above, you may wonder why they are so low, because it often doesn’t feel like that in daily life.
One reason for this could be our own unique experiences and perceptions. For example, when we only pay attention to certain items that we don’t purchase often and notice a “sudden” increase, we may think that prices are rising at a fast pace.
Another reason for this “disconnect” is because of a limitation to the CPI’s data.
In compiling the prices of different goods and services, a fixed basket has to be used since it’s almost impossible to track the price of every single item out there. As a result, actual household expenses may deviate from these data (i.e., not all households buy the same items).
Having said that, the data still provide meaningful insights.
How to Project Future Costs?
Taking a look at the average rates, we can see that they don’t exceed 2.00%.
To project future costs, we should include a buffer in order to ensure that we still have enough in case things go sideways. For that, you could assume a rate of 3.00 or 4.00%.
To calculate how much you need for retirement, you can simply take your expected expenses during retirement (in today’s value) and apply an inflation rate of, say, 3.00% over the number of years to your retirement age. Or, you can simply use a retirement planning calculator.
The same concept applies to calculating your children’s education fund.
Apart from projecting future costs, you can also estimate the “real” rate of return on an investment by simply taking the expected rate from that investment and subtracting the inflation rate.
In knowing the average inflation, you can also see how your cash is devaluing over time. To illustrate, if you leave $10,000 in the bank while earning 0.05% per year with an annual inflation of 3%, that “value” is worth only $5,494.28 after 20 years.
What Can You Do About the Rising Cost of Living?
A moderate amount of inflation is perfectly normal in a growing economy.
Singapore has gone through good economic growth, and its standard of living (and the costs of it) have gone up since its independence.
It’s very likely that inflation will continue for a long time, and along with it, effects such as the rising cost of living and cash in the bank losing value over time.
So what can we do to prepare for this?
Outside of having sufficient emergency funds and short-term financial goals and commitments, you should consider placing your excess cash into various alternatives that can provide potentially higher returns above the average annual inflation rate.
If you’re planning for your retirement, consider some options to invest your money, depending on your risk appetite.
