MasterCard and Singapore Management University launch Singapore Inflation Index

The new Index will be highlighting the spectrum of factors that impact inflation expectations.

Inflation expectation is an important economic gauge for many Singaporeans and businesses. A new Index highlighting the spectrum of factors that impact the inflation expectations was jointly launched by MasterCard and Singapore Management University.

The SKBI-MasterCard Singapore Index of Inflation Expectations, which was jointly developed by Dr Aurobindo GHOSH and Professor Jun YU from SMU Sim Kee Boon Institute for Financial Economics, and MasterCard, is based on a survey of around 400 randomly selected individuals from households in Singapore.

Two surveys were conducted last year through the joint collaboration: one in September and another in the first week of December. In the first survey, consumers were asked a variety of demographic and socioeconomic questions. Consumers then shared their views on perceived values of economic variables over the next one to five years. In the second survey, questions pertaining to investors’ sentiment on current and future equity investments were added.

SMU President, Professor Arnoud De Meyer said, “For the past one year, inflation has been in the minds of many Singaporeans. Its movements affect how households, employers and central bankers make decisions. Understanding how inflation expectations are formed and its impact on various economic decisions is thus instrumental in any discourse on economic policy. It is with great pride that I introduce the inflation expectation index jointly developed by SMU SKBI and MasterCard. Since its launch in July 2008, SKBI has been developing and applying research on financial economics with special relevance to Singapore and Asia. The creation of the index is a great example to showcase how SKBI can help the industry and the public.”

“Inflation has been a pressing issue for governments, economists, businesses and consumers in the last year and its role as a tool of economic management has been discussed, analysed and debated in the media around the world,” said Vicky Bindra, president of Asia/Pacific, Middle East & Africa for MasterCard Worldwide.

“The SKBI-MasterCard Singapore Index of Inflation Expectations will be a valuable addition to this debate and its creation is a testament to the emphasis MasterCard places on working with highly credible and innovative organizations for the benefit of industry and society.”

For the current year, the SInDEx1 (which measures inflation expectations over one year) remained almost the same in both the September and December 2011 surveys at 4.62%. As for the next five years, SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx5, which measures inflation expectations over five years) decreased slightly from 5.2% in September to 5.16% in December.

The study found that in the medium term of one year, households’ awareness of the economic conditions played a crucial role in forming current expectations. One of the strongest and most persistent factors found to have influenced inflation expectations was the exposure to media coverage on global economic issues. Those who followed media reports were found to have a lower inflation expectation.

The study also found that inflation expectations were affected by the long term relationship of the individual through citizenship status or length of stay. For the long term (or five-year forecast), the level of confidence in future equity investment plays a crucial part in expectation formed by households. The level of uncertainty plays a significant role in periods of stress.

Dr. Yuwa Hedrick-Wong, global economic advisor, MasterCard Worldwide, said, “The
massive debt overhang in many developed economies has made rising inflation a more
serious and ever-present threat and the central banks’ task of maintaining price stability more
challenging.”

“In 2012, for instance, governments in OECD countries will need to borrow an equivalent of
15% of world GDP. Thus, getting monetary policy right under such circumstances is critical
in order to support economic growth while keeping inflation under control. A key insight in
getting monetary policy right is a more precise estimate of inflation expectation, especially
for a small and open economy like Singapore.”