Commentary: Fighting inflation is more than having higher wages offset cost of living increases
As Singapore’s inflation soars, there are concerns about a wage-price spiral, how fast the Singdollar is appreciating and the impact of the imminent GST hike. Finding the right economic and monetary policy balance is crucial, says the Lee Kuan Yew School of Public Policy’s Terence Ho.
SINGAPORE: Singapore’s core inflation continues ticking upwards. Official data released on Jul 25 showed a 4.4 per cent year-on-year increase in June, the highest since November 2008 amid the global financial crisis.
Although the Monetary Authority of Singapore (MAS) has projected it to ease after peaking in the third quarter, core inflation is expected to remain high at around 3.5 per cent to 4 per cent towards the end of the year.
This is unsurprising given continued global supply chain disruptions, the ongoing Russia-Ukraine war and the lasting effects of the COVID-19 pandemic, from which Singapore is unable to fully insulate itself.
Rising prices will affect all Singaporeans, particularly the lower to middle-income, who spend a large part of their budget on essential items like food and utilities.
IS A WAGE-PRICE SPIRAL LIKELY?
Faced with a higher cost of living, will workers demand larger pay raises? Some are worried that a wage-price spiral could be in the making. This is when workers ask for higher wages to offset inflation and maintain purchasing power, and employers in turn raise prices to offset higher labour costs.
When inflationary expectations become entrenched, it becomes difficult for regulators to bring down inflation without incurring the high costs of slower growth and higher unemployment.
However, there are reasons to believe a wage-price spiral may not take root here.
MAS managing director Ravi Menon pointed out in July that automatic wage indexation is not common in Singapore, and that the pass-through from prices to wages has been historically weak. This is in contrast to countries like Belgium and Luxembourg where salaries are automatically adjusted according to inflation, a practice that may be difficult to sustain as prices soar.
For a wage-price spiral to occur, higher wages also need to be passed on to consumers through higher prices. The extent to which this happens varies by sector depending on the share of labour cost in total business cost, as well as the strength of market demand for different goods and services. Higher productivity can also help offset increased labour costs.
Notwithstanding, there remain risks if wage growth outstrips productivity growth over a sustained period. The labour market in Singapore is tight and is expected to remain so for some time. In the first quarter of 2022, the ratio of job vacancies to unemployed people was at its highest since 1998, suggesting that it has not been easy to fill vacancies with locals, while the size of the non-resident workforce remains below its pre-COVID level.
NAVIGATING POLICY TIGHTROPES
All these point to several policy tightropes which the Government has to navigate in the ensuing months.
The first is how quickly and forcefully to tighten monetary policy. The MAS recently announced its fourth policy tightening move since October 2021. The Singapore dollar has appreciated, even hitting record levels, against major currencies including the yen, the euro and the British pound.
The appreciation in the Singapore dollar against most major trading partners has helped to stem imported inflation and eased price pressures by crimping aggregate demand, but this will come at the cost of slower economic growth.
This is a balance policymakers elsewhere are grappling with too. The United States Federal Reserve has been attempting a “soft landing”, raising interest rates to bring prices under control while trying not to tip the economy into recession.
The MAS can likewise be expected to take a calibrated approach, balancing the need for price stability and economic growth.
A second question is whether to go ahead with the Goods and Services Tax (GST) increase of 1 percentage point in 2023 and another percentage point in 2024, and whether to defer carbon tax hikes planned between 2024 and 2030.
This is about whether medium-term imperatives – for sound public finances and the green transition – should be put on hold while Singapore grapples with rising prices.
But since inflation may stay elevated for some time, there is not necessarily a better window in which to raise GST and structural spending needs continue to grow.
As for the carbon tax, there is still time for businesses to make the necessary adjustments before the planned tax increases from 2024 onwards.
STAYING THE COURSE ON LABOUR MARKET ADJUSTMENT
Given the hard realities of containing inflation, the question becomes one of helping citizens and households tide over this storm. Fortunately, Singapore has the means to provide relief in the form of a S$1.5 billion support package announced in June.
Help will remain targeted to the lower-income and more vulnerable, as a broad fiscal stimulus risks further stoking inflation. Deputy Prime Minister and Finance Minister Lawrence Wong has indicated that the Government will continue to monitor the economic situation and could provide further support if necessary.
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Relief packages, however, cannot be sustained indefinitely if inflation remains elevated into next year and beyond. It will be necessary to find structural solutions - whether larger permanent transfers, higher wages underpinned by higher productivity, or a combination of these.
The pace of labour market adjustments also has to be considered in the light of immediate cost pressures
A key initiative is the Progressive Wage Model, which aims to raise the pay of lower-wage workers across various sectors and occupations, in tandem with skills upgrading and increased productivity. This will help to shape a more inclusive society where all workers are valued and paid fairly for their contributions.
Another set of policy moves is intended to calibrate the inflow of foreign workers. These include raising the minimum salary requirements for Employment and S-Pass holders, raising S-Pass levies and tightening the dependency ratio ceilings in the construction and process sectors.These initiatives, while critical for a sustainable and resilient workforce, contribute to higher wage and business costs. It would however be unwise to backtrack on structural adjustments that have longer-term policy objectives when we still have other ways to manage the impact of inflation.
Instead, effort could be directed at improving the efficiency of labour market matching while facilitating the entry of foreign workers to plug critical gaps in the workforce.
The impact of higher labour costs could also be mitigated by redoubling efforts at raising automation and productivity, and through upskilling and reskilling workers.
Still, it would be best to defer for now any further policy moves, beyond what has been announced, that may exacerbate the labour supply crunch and push up wages and prices further.
Finding the right policy balance will be necessary to steer the economy through the inflationary tempest while keeping our sights trained on the goal of a competitive, future-oriented, inclusive and sustainable Singapore.
Terence Ho is Associate Professor in Practice at the Lee Kuan Yew School of Public Policy. He is the author of Refreshing the Singapore System: Recalibrating Socio-Economic Policy for the 21st Century (World Scientific, 2021).