Forecasters expect price rises to decrease later in the year, however, and CIMB economist Song Seng Wun told Today that he expects 2011 inflation to come in at 3.8 percent since inflation “would moderate a bit in the second half of the year.”

Just try telling the average person on the street that inflation is only four to five percent, though, and you may well get a look of stunned disbelief.

One man said his fishball noodles have increased 25 percent from $2 to $2.50 for a smaller portion, for example, and data on Petrolwatch shows that fuel prices at Shell and SPC have risen more than 14 percent since April 2010. SP Services said electricity prices increased three percent in the first quarter of 2011 and another six percent in the second quarter. And the Straits Times reported earlier in the year that Singapore is now the fifth most expensive country in the world to rent a two-bedroom property, after a 15 percent increase in monthly rents last year.

Beleaguered consumers may wonder, then, why the official numbers are so different from what they actually see at the store and how much will prices actually rise this year.

The Consumer Price Index

The data that SingStat uses to calculate the Consumer Price Index (CPI) actually seems like it should reflect actual price changes. SingStat says that “the goods and services included for pricing in the CPI are representative of those commonly purchased by the majority of the households.” Last year SingStat expanded the number of brands it checks to 6,500, and it says it checks pricing at 4,200 outlets.

Delve deeper into the details, however, and it’s easier to see why the official numbers may be lower than what many people actually see.

Housing costs, for example, include estimated amounts for owner-occupied properties that are based on Inland Revenue’s estimate of rental rates, and those rates may appear low to some thankful homeowners who pay lower taxes as a result. And housing also includes rebates from the government to HDB homeowners, further lowering the CPI increases.

A significant part of transport prices, which account for 15 percent of the CPI, is automobile prices. SingStat says that transportation costs went down 0.6 percent in March due to decreases in car prices. Even though a car purchase is usually a one-time cost, every few years, consumers may have seen petrol prices go up.

Bread and butter issues

While SingStat would robustly defend its methodology, a key issue may be that what many consumers actually feel they buy every day could be different from the SingStat basket.

Some of the smaller portions, like two fish balls in the noodles instead of four or a slightly smaller loaf of bread, may also be hard to count. While there isn’t a definitive answer for the discrepancy, it’s an issue economists could debate for hours on end.

Regardless of whether the CPI matches what consumers believe, the other key question is whether prices will continue to increase at such a high rate. And on that front, the news isn’t so good.

The United Nations’ food-price index rose 34 percent from a year earlier, with all five food groups advancing. - Business Week

Food prices, which account for 22 percent of the CPI, seem likely to continue rising. Business Week said in March that “the United Nations' food-price index rose 34 percent from a year earlier, with all five food groups advancing.” With continuing droughts and unrest affecting production of commodities like wheat and even rice, consumers can expect further increases.

Housing prices are also heading north, albeit at a slower rate. Even after the 15 percent rise in housing prices last year and government measures to cool demand, Propnex Realty CEO Mohamed Ismail told Today recently that increases “will be led by the mass market having the highest increase of about eight to ten percent,” and rentals look set to increase too.

Even after a rise of more than 20 percent since mid-2010, oil prices could well stay high amidst continuing turmoil in the Middle East, though many forecasters expect prices could moderate if the situation quiets later in the year.

Exchange rate policy

One mitigating factor, fortunately, is that the Monetary Authority of Singapore (MAS) uses the exchange rate* to help control inflation. MAS said in April that it would “re-center” the exchange rate policy band and “this policy will ensure price stability in the medium term.” The increase of more than 10 percent in the value of the Singapore dollar over the past year and further increases on the horizon could help to moderate inflation.

While it’s easy to debate how the CPI is measured, what really matters is how prices affect consumers’ pocketbooks. And on that front, inflation looks set to be an issue for consumers for some time to come.

* Look out for Richard Hartung’s piece on the exchange rate next week.

Richard Hartung | 18 May 2011