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Why “deflation” is a dirty word to Singaporeans
Written by: Ryan Ong
Singapore has experienced defl… sorry, “negative inflation”, for 13 consecutive months. And when the media publish reassurances practically every month since December 2014, that’s definitely a sign that nothing is wrong. Don’t pack your bags and flee the country or anything, because you may end up blocking my cab to the airport. And don’t say the word deflation. If you don’t say it, it doesn’t exist.
What is the deal with negative inflation?
Singapore first headed into negative inflation during November 2014. It was the first time since 2009, in the aftermath of the Global Financial Crisis, that we had a negative inflation rate. At the time, we didn’t think it would last. Here’s what was said in 2014:
Well, it’s now February 2016, and negative inflation hasn’t gone away. The Consumer Price Index (CPI), which tracks inflation by monitoring the price of a basket of goods, has fallen a further 0.8 per cent from the same time last year.
Most of this are beyond our control. The global economy is behaving with all the productivity and logic of a six-year-old’s tantrum, and the continued slide in oil prices is something we’re powerless to address. But you may be wondering…
Isn’t negative inflation good for the individual wallet?
Inflation is the natural ally of anyone trying to sell you a financial product. Inflation rate risk is the oft-repeated argument that, because the costs of goods are rising, your savings and earnings will need to rise with it. The higher the inflation rate is, the less your money will be worth in the future.
Now most people assume the opposite, defla…sorry, negative inflation, must be awesome. It means your money is worth more today than it will in the future. Things will only get cheaper. But that’s only true in the short term.
Think of negative inflation, like cheap oil, as the satisfaction you get from a $10 sushi buffet. It feels great at the time, but by the 72nd round of explosive diarrhea, you’ll wish you were dead.
The trouble with prolonged negative inflation is that, while the prices of goods are falling, your sources of income tend to fall even faster. The sequence of a deflationary spiral, which led to the Great Depression in the 1920s, works like this:
Now the argument from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) is that we’re totally not in a deflationary situation. No chance. Inflation is just falling for a little bit due to the global situation, and it’s a momentary thing.
Deflationary spirals only happen to other countries, like Japan.
What keeps causing negative inflation?
Most honest economists will tell you the study of inflation is a lot like trying to figure out which diets actually work. It varies so much between individual cases, you tend to end up with a calculated guess. So always take it with a pinch of salt.
But the main forces of negative inflation here seem to be:
1. Loan curbs in the property market
In regard to the CPI (core inflation excludes private housing), housing and utilities account for most of the downward price pressure, falling 0.4 per cent in January this year. Housing and utilities weigh more than 25 per cent in the CPI, so a decline in this segment can bring down the inflation rate significantly.
Cooling measures have sent the property market into a tailspin, but this is planned – the aim is to lower prices after an overheated market peaked in 2013. The Total Debt Servicing Ratio (TDSR) framework, which limits loans to 60 per cent of the borrower’s monthly income, is one of the main factors pushing property prices down.
I would add that two schemes aimed at property developers – the ABSD and the Qualifying Certificate (QC) schemes – can force prices even lower. The ABSD and QC impose penalties on developers that cannot complete a development and sell off all the units within a time limit (five years or seven years.) As buyers are aware of the deadlines, they will likely hold purchases in the expectation that developers will grow desperate and slash prices.
2. Loan curbs in the car market
In February 2013, MAS imposed loan curbs on motor vehicle loans:
For motor vehicles with an Open Market Value (OMV) of $20,000 or less, buyers can only borrow up to 60 per cent of the cost. For vehicles with an OMV of more than $20,000, buyers can only borrow up to 50 per cent. In addition, the maximum loan tenure is five years.
“Putting a down payment of $50,000+ on a car, instead of your flat is a good idea,” said no school of finance ever. So car prices went down as planned, and this will likely continue. Private road transport costs are down around 1.4 per cent.
3. Some G subsidies in healthcare
Healthcare prices dipped a little, by 0.1 per cent. This was attributed to the new MediShield Life scheme, a universal health insurance plan that was implemented in November 2015.
While premiums are expected to be higher, these have so far been offset by rebates.
4. Overall impact of low oil prices
Energy costs impact businesses in many different ways. When oil prices dip, for example, everything from the cost of transporting goods to airline flights will get cheaper. Each business is impacted differently, and to a different degree, by the low oil prices; but generally, prices will fall.
Deflation from oil prices can be serious if the low costs are sustained over a long period (probably, as we can now extract oil from shale rock), and if the savings from low oil prices are hoarded rather than being spent elsewhere (e.g. if a business uses savings from oil prices to expand and hire more people, that won’t contribute to deflation.)
Low oil prices are bad in the long run, but it’s hard to predict exact outcomes or how long the trend will carry on for.
Just don’t say deflation
Here’s the silver lining: on paper, everything is going to plan. True deflation would mean the prices of everything fall at once. What we’re seeing is negative inflation because of declines in targeted segments, like housing, private transport, and healthcare – that suggests things are under control, because we’re doing it deliberately.
But this may be a delicate balancing act – it’s like walking a tightrope. You need to lean left if you feel you’re going too far right; but overdo it and you’ll still fall off.
So don’t say deflation. You’ll invite the devil to the door.
Why “deflation” is a dirty word to Singaporeans
Written by: Ryan Ong
Singapore has experienced defl… sorry, “negative inflation”, for 13 consecutive months. And when the media publish reassurances practically every month since December 2014, that’s definitely a sign that nothing is wrong. Don’t pack your bags and flee the country or anything, because you may end up blocking my cab to the airport. And don’t say the word deflation. If you don’t say it, it doesn’t exist.
What is the deal with negative inflation?
Singapore first headed into negative inflation during November 2014. It was the first time since 2009, in the aftermath of the Global Financial Crisis, that we had a negative inflation rate. At the time, we didn’t think it would last. Here’s what was said in 2014:
Well, it’s now February 2016, and negative inflation hasn’t gone away. The Consumer Price Index (CPI), which tracks inflation by monitoring the price of a basket of goods, has fallen a further 0.8 per cent from the same time last year.
Most of this are beyond our control. The global economy is behaving with all the productivity and logic of a six-year-old’s tantrum, and the continued slide in oil prices is something we’re powerless to address. But you may be wondering…
Isn’t negative inflation good for the individual wallet?
Inflation is the natural ally of anyone trying to sell you a financial product. Inflation rate risk is the oft-repeated argument that, because the costs of goods are rising, your savings and earnings will need to rise with it. The higher the inflation rate is, the less your money will be worth in the future.
Now most people assume the opposite, defla…sorry, negative inflation, must be awesome. It means your money is worth more today than it will in the future. Things will only get cheaper. But that’s only true in the short term.
Think of negative inflation, like cheap oil, as the satisfaction you get from a $10 sushi buffet. It feels great at the time, but by the 72nd round of explosive diarrhea, you’ll wish you were dead.
The trouble with prolonged negative inflation is that, while the prices of goods are falling, your sources of income tend to fall even faster. The sequence of a deflationary spiral, which led to the Great Depression in the 1920s, works like this:
- Consumers see that prices are falling, so they withhold purchases. It will just be cheaper in a few months or years, so why buy now?
- Companies reduce output because they have all this inventory that nobody is buying.
- As companies sell and produce less, they eventually reduce their headcount as well. That means people getting retrenched.
- As job security gets worse, and unemployment rises, consumers can afford less. Everyone is also terrified of spending because of the bad economic situation, so companies start to make even less.
- Companies cut even more jobs, consumers have even less spending power, and the cycle continues until wandering tribes attack each other for canned beans in the post-apocalyptic ruins of the Vivocity parking lot.
Now the argument from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) is that we’re totally not in a deflationary situation. No chance. Inflation is just falling for a little bit due to the global situation, and it’s a momentary thing.
Deflationary spirals only happen to other countries, like Japan.
What keeps causing negative inflation?
Most honest economists will tell you the study of inflation is a lot like trying to figure out which diets actually work. It varies so much between individual cases, you tend to end up with a calculated guess. So always take it with a pinch of salt.
But the main forces of negative inflation here seem to be:
- Loan curbs in the property market
- Loan curbs in the car market
- Some G subsidies in healthcare
- Overall impact of low oil prices
1. Loan curbs in the property market
In regard to the CPI (core inflation excludes private housing), housing and utilities account for most of the downward price pressure, falling 0.4 per cent in January this year. Housing and utilities weigh more than 25 per cent in the CPI, so a decline in this segment can bring down the inflation rate significantly.
Cooling measures have sent the property market into a tailspin, but this is planned – the aim is to lower prices after an overheated market peaked in 2013. The Total Debt Servicing Ratio (TDSR) framework, which limits loans to 60 per cent of the borrower’s monthly income, is one of the main factors pushing property prices down.
I would add that two schemes aimed at property developers – the ABSD and the Qualifying Certificate (QC) schemes – can force prices even lower. The ABSD and QC impose penalties on developers that cannot complete a development and sell off all the units within a time limit (five years or seven years.) As buyers are aware of the deadlines, they will likely hold purchases in the expectation that developers will grow desperate and slash prices.
2. Loan curbs in the car market
In February 2013, MAS imposed loan curbs on motor vehicle loans:
For motor vehicles with an Open Market Value (OMV) of $20,000 or less, buyers can only borrow up to 60 per cent of the cost. For vehicles with an OMV of more than $20,000, buyers can only borrow up to 50 per cent. In addition, the maximum loan tenure is five years.
“Putting a down payment of $50,000+ on a car, instead of your flat is a good idea,” said no school of finance ever. So car prices went down as planned, and this will likely continue. Private road transport costs are down around 1.4 per cent.
3. Some G subsidies in healthcare
Healthcare prices dipped a little, by 0.1 per cent. This was attributed to the new MediShield Life scheme, a universal health insurance plan that was implemented in November 2015.
While premiums are expected to be higher, these have so far been offset by rebates.
4. Overall impact of low oil prices
Energy costs impact businesses in many different ways. When oil prices dip, for example, everything from the cost of transporting goods to airline flights will get cheaper. Each business is impacted differently, and to a different degree, by the low oil prices; but generally, prices will fall.
Deflation from oil prices can be serious if the low costs are sustained over a long period (probably, as we can now extract oil from shale rock), and if the savings from low oil prices are hoarded rather than being spent elsewhere (e.g. if a business uses savings from oil prices to expand and hire more people, that won’t contribute to deflation.)
Low oil prices are bad in the long run, but it’s hard to predict exact outcomes or how long the trend will carry on for.
Just don’t say deflation
Here’s the silver lining: on paper, everything is going to plan. True deflation would mean the prices of everything fall at once. What we’re seeing is negative inflation because of declines in targeted segments, like housing, private transport, and healthcare – that suggests things are under control, because we’re doing it deliberately.
But this may be a delicate balancing act – it’s like walking a tightrope. You need to lean left if you feel you’re going too far right; but overdo it and you’ll still fall off.
So don’t say deflation. You’ll invite the devil to the door.
