Explain a possible demand side reason and a possible supply side reason for the rise in the rate of inflation in Singapore.
Singapore is expected to face rising inflation due to a combination of external and local factors — including a strong global economic rebound driven by the rollout of Covid-19 vaccines, geopolitical tensions pushing up food and energy prices, and a tight labour market. In response, the Monetary Authority of Singapore has permitted the Singapore dollar to strengthen and urged businesses to adopt technology to manage costs more efficiently.
a. Explain a possible demand side reason and a possible supply side reason for the rise in the rate of inflation in Singapore. [10]
Introduction
Inflation refers to a sustained increase in the general price level of goods and services in an economy over time. In Singapore, inflation is influenced by various factors, including demand-pull inflation, cost-push inflation, and imported inflation. Demand-pull inflation occurs when aggregate demand increases beyond an economy’s productive capacity, while cost-push inflation arises from rising production costs that firms pass on to consumers. Additionally, imported inflation results from higher prices of imported goods due to external factors such as global supply chain disruptions. In the current economic climate, Singapore faces inflationary pressures driven by both demand-side and supply-side factors, including increased consumer spending following the lifting of COVID-19 restrictions, global geopolitical tensions affecting food and energy prices, and a tight labour market.
Demand pull inflation (Demand-side reason)
One key demand-side factor contributing to inflation in Singapore is the surge in consumption and net exports (X-M) following the easing of COVID-19 restrictions. The removal of travel bans, social distancing measures, and mask mandates has led to improved consumer confidence, encouraging greater spending on goods and services. With increased economic activity, consumption (C), a major component of aggregate demand, has risen significantly.
Furthermore, the reopening of international borders has revitalized the tourism sector, leading to an increase in tourist arrivals and spending. This has resulted in a rise in net exports (X-M), further driving up aggregate demand.
Given that Singapore is operating at or near full employment due to a tight labour market, the increase in AD translates more directly into higher price levels rather than increased output. With little excess capacity in the economy to absorb the additional demand, firms respond by raising prices, resulting in demand-pull inflation.
This is represented by an increase in AD from AD0 to AD1 which results in general price level to increase from P0 to P1, which is a much greater increase as compared to the increase in real national output from Y0 to Y1.
Imported inflation (Supply-side reason)
A significant supply-side factor contributing to inflation in Singapore is the increase in global food and commodity prices due to the ongoing Russo-Ukrainian war. Russia and Ukraine together account for nearly a third of the world's wheat supply, while Ukraine is also a major exporter of corn and sunflower oil.
As a result of widespread economic sanctions on Russia and the disruptions caused by the war, the supply of these essential goods has been severely constrained, leading to rising global prices for food, fertilizers, and raw materials.
Since Singapore imports the vast majority of its food and other essential commodities, the country is highly vulnerable to these external price shocks. When global prices of imported goods rise, the cost of living in Singapore increases as consumers have to pay more for essential goods.
This phenomenon, known as imported inflation, occurs when higher import prices translate directly into higher domestic prices. As a result, Singapore’s inflation rate has risen due to external factors beyond its control, exacerbating the overall cost of living.
Cost-push inflation (Supply-side reason)
Another supply-side factor contributing to inflation is the rise in production costs due to global supply chain disruptions. One major example is the worldwide shortage of semiconductors, which has led to production stoppages for many electronics manufacturers and a general increase in the cost of production for various goods and services.
Additionally, the Russo-Ukrainian war has caused a sharp increase in the prices of raw materials such as steel and fertilizers, further raising costs for businesses.As firms face higher costs of production, they pass these costs on to consumers in the form of higher prices, resulting in cost-push inflation.
This is represented by a leftward shift of the short-run aggregate supply (SRAS) curve from AS0 to AS1, leading to an increase in the general price level from P0 to P1. Since Singapore is a highly import-dependent economy, the rise in global input costs has significantly contributed to domestic inflationary pressures.
Conclusion
In conclusion, the recent surge in Singapore’s inflation rate is driven by both demand-side and supply-side factors. On the demand side, a rebound in domestic consumption and tourism has led to stronger aggregate demand, pushing up prices in an economy already operating near full employment. On the supply side, external shocks such as the Russo-Ukrainian war and global supply chain disruptions have led to higher input and import costs, causing both cost-push and imported inflation. These overlapping inflationary pressures highlight the complexity of managing price stability in a small, open economy like Singapore, where both domestic recovery and external vulnerabilities must be carefully monitored.
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