Explain one demand-side and one supply-side factor that could result in a rise in inflation in Singapore.
Singapore is expected to face rising inflation due to a combination of global and local factors—these include a robust global economic rebound following the rollout of COVID-19 vaccines, geopolitical tensions pushing up food and energy prices, and a tightening labour market. In response, the Monetary Authority of Singapore has allowed the Singapore dollar to strengthen and has urged businesses to adopt technology to help manage and reduce costs.
a. Explain one demand-side and one supply-side factor that could result in a rise in 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. It reduces the purchasing power of money and can arise from either demand-side or supply-side factors. In Singapore’s case, recent inflationary pressures have stemmed from both domestic and global developments. One key demand-side factor is the post-pandemic recovery in consumer and tourist spending, while on the supply side, rising global commodity prices due to geopolitical tensions have played a significant role.
Demand-Side Factor
Following the easing of COVID-19 restrictions, Singapore has witnessed a sharp recovery in consumer confidence and spending. The lifting of social distancing rules, mask mandates, and capacity limits on travel, dining, and retail activities has led to a surge in consumption (C). Households, previously cautious due to uncertainty, are now more willing to spend on both goods and services, particularly in sectors such as hospitality, entertainment, and transport.
In addition, border reopenings and the resumption of global air travel have triggered a significant increase in inbound tourism, raising export revenue from services. This improvement in the (X – M) component of Aggregate Demand has further boosted overall demand in the Singapore economy.
As a result, Aggregate Demand (AD) has shifted rightward from AD₀ to AD₁, increasing real output and price levels in the short run. Given that Singapore is currently operating at or near full employment—reflected in a tight labour market where wages are rising—this increase in demand exerts upward pressure on prices, leading to demand-pull inflation. Firms, facing strong consumer demand and limited spare capacity, may raise prices to manage rising input and wage costs while maintaining profit margins.
Supply-Side Factor
On the supply side, Singapore is highly vulnerable to imported inflation due to its limited natural resources and heavy reliance on foreign goods. One of the key drivers of imported inflation in recent years has been the Russo-Ukrainian war, which has severely disrupted global supply chains for energy and food.
Russia and Ukraine together account for a large share of the global supply of commodities such as wheat, corn, sunflower oil, fertilisers, and natural gas. With sanctions placed on Russia and the ongoing conflict in Ukraine disrupting production and exports, global prices for these essential goods have surged. For example, higher prices of wheat and cooking oil translate into costlier food imports for Singaporean consumers.
Since Singapore imports almost all of its food and energy, the rise in global commodity prices directly increases the domestic cost of living. These higher import prices contribute to imported inflation, where the general price level rises not due to domestic demand but because the prices of foreign goods rise in SGD terms.
Furthermore, higher energy and food costs also feed into cost-push inflation. Firms that use imported inputs like oil, metals, or fertilisers face rising costs of production, leading to a leftward shift of the Short-Run Aggregate Supply (SRAS) curve from AS₀ to AS₁.
Conclusion
In summary, inflation in Singapore today is being driven by both demand-side and supply-side factors. On the demand side, the recovery in consumer spending and tourism has pushed up AD, resulting in demand-pull inflation. On the supply side, rising global food and energy prices—exacerbated by geopolitical tensions—have raised import and production costs, causing imported and cost-push inflation. The combined effect of these forces explains the rise in Singapore’s general price level and highlights the complex nature of inflation in a highly open and trade-reliant economy like Singapore.
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