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Inflation was high in 2022. Here’s why.
Shortly after emerging from the COVID-19 recession, Singapore was confronted by yet another economic challenge: high inflation.
Consumer prices in Singapore went up by 6.1 percent in 2022 compared to the previous year, the fastest rate of increase since 2008. Meanwhile, MAS Core Inflation—which excludes private road transport and accommodation costs and is seen as a better gauge of the day-to-day price changes impacting households—reached 4.1 percent in 2022.
The dramatic rise in inflation was driven by several shocks to demand and supply in the global and Singapore economies. Let's take a closer look at these factors.
Strong demand and constrained supply in the global economy
When the pandemic broke out in 2020, many countries imposed movement restrictions to contain the spread of the virus. As a result, demand for goods and services decreased sharply and consumer prices fell.
Once COVID-19 vaccines were successfully developed, countries with higher vaccination rates were able to re-open their economies gradually over 2021. Demand rebounded strongly, as people went out spent on goods and services that they had been unable to purchase during the worst of the pandemic. The unleashing of this “pent-up” demand meant that businesses could raise their prices, which drove demand-pull inflation.
While demand was recovering strongly, supply did not keep up. Pandemic-related restrictions had to be re-imposed from time to time in many countries to contain new infection waves. As a result, operations at factories, stores, and ports continued to be disrupted. This affected logistics, transportation, and production supply chains across the world, resulting in delays and shortages.
Due to strong demand and constrained supply, prices of global food and energy commodities, as well as for goods and services produced in many economies, began rising quickly from the second half of 2021.
The outbreak of the Russia-Ukraine war in February 2022 added to these inflationary pressures. The two countries are major suppliers of key commodities such as oil and gas, as well as fertiliser, wheat, and edible oils. The war disrupted their supply and generated considerable uncertainty, causing commodity prices to spike. As a result, costs and prices in many economies rose further.
For instance, higher energy prices drove up electricity and transport costs for consumers and businesses. Higher grain prices also meant that bread became more expensive to produce and sell. As grains are used in animal feed, the price of meat increased as well.
Once COVID-19 vaccines were successfully developed, countries with higher vaccination rates were able to re-open their economies gradually over 2021. Demand rebounded strongly, as people went out spent on goods and services that they had been unable to purchase during the worst of the pandemic. The unleashing of this “pent-up” demand meant that businesses could raise their prices, which drove demand-pull inflation.
While demand was recovering strongly, supply did not keep up. Pandemic-related restrictions had to be re-imposed from time to time in many countries to contain new infection waves. As a result, operations at factories, stores, and ports continued to be disrupted. This affected logistics, transportation, and production supply chains across the world, resulting in delays and shortages.
Due to strong demand and constrained supply, prices of global food and energy commodities, as well as for goods and services produced in many economies, began rising quickly from the second half of 2021.
The outbreak of the Russia-Ukraine war in February 2022 added to these inflationary pressures. The two countries are major suppliers of key commodities such as oil and gas, as well as fertiliser, wheat, and edible oils. The war disrupted their supply and generated considerable uncertainty, causing commodity prices to spike. As a result, costs and prices in many economies rose further.
For instance, higher energy prices drove up electricity and transport costs for consumers and businesses. Higher grain prices also meant that bread became more expensive to produce and sell. As grains are used in animal feed, the price of meat increased as well.
Higher global prices drove up import costs into Singapore
These demand-supply imbalances in the global economy had a significant impact on Singapore, a very open economy that is highly reliant on imported goods and services.
40%
goes to imports
out of every $1 Singapore household spending
90%
of Singapore's food
is imported
Strong post-pandemic demand recovery in Singapore
Similar to the global picture, demand in Singapore grew strongly as the impact of the pandemic waned. The Singapore economy staged a robust rebound in 2021, expanding by 7.6 percent after the 4.1 percent contraction in 2020.
As safe management measures and other restrictions were gradually eased over 2021 and into 2022, Singaporeans were eager to resume shopping and dining out in larger groups. With international travel mostly closed until April 2022, nearly all of this “pent-up” demand was unleashed within Singapore.
At the same time, the labour market in Singapore improved as the re-opening of the economy gradually gave businesses confidence to hire more workers. Wages rose as a result. While this is good for workers, it added to the rising costs faced by these businesses.
Indeed, business costs rose more quickly in 2022 compared to the pre-pandemic period. With consumer demand still strong, firms were able to pass on these rapidly rising costs to their customers by increasing the prices of goods and services across the economy. These demand-pull factors led to high inflation.
Managing inflation
In sum, both cost-push as well as demand-pull pressures contributed to higher inflation all over the world, including in Singapore.
Central banks like MAS are responsible for helping to keep inflation low and stable. Given the many factors at play, it is certainly not a straightforward task.
In the next article, we will find out how inflation is measured.
Global
demand and supply factors
Pandemic: disrupted manufacturing and supply chains
China’s zero-Covid policy: disrupted industrial and consumer exports to the world
Ukraine-Russia war: disrupted supplies of energy and food
Other factors: poor weather conditions and food export bans affect supplies of food to Singapore
Domestic
demand and supply factors
Re-opening: pent-up consumer demand
Rising wages: Singapore’s tight labour market
Rising wages: Singapore’s tight labour market