Economic Essay

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  • Topic: Inflation, Cost-push inflation, Demand-pull inflation
  • Pages : 5 (1212 words )
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  • Published : January 23, 2013
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Title:
Inflation hits 5.2% in March

Introduction:
The key economic issue in this article would be the increasing inflation that Singapore is facing. Inflation is the sustained and inordinate increase in the general price level in an economy which faces a higher cost of living. In recent times, there has been an increase in consumer price index (CPI) for vehicle prices and housing rentals. This has resulted in a reverse trend of moderating inflation. The article ‘Inflation hits 5.2% in March’ (2012) presents an alternative view. The author suggest that the inflation rises the possibility of moves by Monetary Authority of Singapore (MAS), which would let the Singdollar appreciate at a faster pace. The author suggests that the contributors to inflation were the usual suspects, car prices and housing cost. Certificate of Entitlement prices for cars has sharply risen during the period of April. Although accommodation cost eased, it is still the main and largest contributor to inflation. ‘Cost of medical treatment have risen at a much faster pace in the past four months. A function of wage revisions and higher electricity costs’ is said by Barclays Capital economist Leong Wai Ho. Which clearly shows that even the electricity tariffs is increasing due to inflation. In discussing rising Inflation, it could be argued that car prices and housing cost are the major factors in contributing to inflation. This paper will discuss the Pros and Cons of Inflation, Demand Pull Inflation, Cost Push Inflation and also the Fiscal Policy.

Discussion: (write more on, cpi/dpi?)
Having hit 5.2% in March 2012, Singapore is facing creeping inflation which means that there is a persistent increase in the general price level of about 4% to 6%. Inflation has both pros and cons. Advantages in moderate inflation includes increase nominal wages, without causing excessive real wage rises. Also, a small amount of inflation makes it easier for the relative price of goods to update. To summarise some advantages when we are having low rate inflation, e.g 2%, but if inflation rises above 2% disadvantages outweighs the advantages. On the other hand, the disadvantages of high inflations rate causes uncertainty and confusion which leads to lesser investments. High inflation also leads to lower competitiveness internationally. Therefore, the two inflations identified would be demand-pull inflation and cost-push inflation.

Demand-pull inflation
Demand-pull inflation occurs when Aggregate Demand (AD) persistently exceeds Aggregate Supply (AS) at current prices so that prices are being pulled upwards. General Price Level
ASS

Figure 1

AD1
P2

AD3
P1

P

AD2
YFN
Y1
0
National Output

As mentioned from the article, the ‘Certificate of entitlement (COE) prices for cars has risen sharply . . . for good vehicles last week.’ (Melissa Tan, 2012) Good vehicles are classified as luxury goods. This means that the people in Singapore have higher disposable income available to purchase these goods. When prices increase and people are still willing to spend, there would be an increase in consumer spending. As seen from figure 1, since AD is made up of consumption, investments, government spending and net imports, AD1 will shift to AD2 when consumption increases, increasing prices from P to P1. Furthermore, despite the decrease of accommodation cost to 9.8%, the demand for housing rentals still constitute a large proportion of inflation. (Melissa Tan, 2012) Rising wages and the inflow of foreign workers has led to an increase in demand for housing. This would then increase consumption causing a rightward shift of the AD curve. The huge demand for COE couple with the demand for housing could lead the AD curve to shift from AD1 to AD2 and finally AD3, leading prices to soar from P to P1 to P2. (Figure 1)

Cost-push...
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