CONSUMER PRICE INDEX (Computation and Changes)

[Mr Speaker in the Chair]

Mr Goh Chee Wee asked the Minister for Trade and Industry (a) whether the Consumer Price Index (CPI) and its basis of computation reflects accurately the change in the cost of living in Singapore; and (b) whether the cost of housing, including the increase in Housing and Development Board purchase price, is taken into consideration in the computation of CPI.

The Minister for Trade and Industry (Dr Hu Tsu Tau): Mr Speaker, Sir, the Consumer Price Index is the most widely used indicator of inflation for consumption expenditure. It is a measure of average price changes for a fixed basket of goods and services commonly used by households in Singapore. This basket was derived from the household expenditure survey conducted between June 1982 and May 1983. It covered a range of household expenditures between $100 per month and $2,999 per month, and this is representative of approximately 91% of the households in Singapore. 4,573 households involving 22,000 individuals participated in the survey and the range of individual items of goods and services covered around 1,450 items.

Hence, for the vast majority of households in Singapore, the CPI could be said to be fairly representative of the cost of living, with one important qualification - the CPI does not measure changes in consumption habits and patterns, because it measures price changes for a fixed basket of goods and services. What does this mean? This is why it is important to distinguish between the concept of cost of living changes and CPI changes.

Perhaps the easiest way to explain this is to give an illustration. A household participated in the 1982-83 survey on an item of food consumption, for example. Let us assume the family went out to eat in 1982-83 once a week. This would be factored into the CPI base of weighting. In the intervening period, assuming the wife decided to go out to work, they had to change their style of living. They now ea out three or four times a week. This is a significant change in the style of living which affects the change in the cost o living but is not picked up by changes in the CPI.

Another example would be a family which in 1982-83 normally travelled by public transport and, in the intervening period, because of promotion of the head of the household, was able to buy a car. This is a significant change in the style of living which is not picked up in the CPI changes. So this is a rather important distinction which Members should recognize.

A survey is carried out once in every five years simply because it is impractical and too expensive to do it more frequently because of the vast amount of work involved. In the majority of countries which have CPI indexes, surveys are carried out once in 10 years, particularly in large countries like the United States.

It might be of interest to Members to know of the history of CPI changes for Singapore over the last 25 years. We have indeed a remarkably good record of inflation. In the last 25 years, in only two years did we have high inflation. We have, in 1973 and 1974, inflation in the range of 20% due to very high cost of imported fuel and food because of the first oil shock. In two years, in 1980 and 1981, inflation of CPI changes was in the range of 8%, partly due to the results of the second oil shock in 1979 and partly because of Government's policy of high wage which started in that year. In the remaining 21 years, 18 of these years have CPI changes or inflation changes of less than 5% and, in 12 of these 21 years, the inflation was indeed below 2%. Last year, the inflation was 2.6% and the preceding year 1.2%. This is indeed a remarkable record due partly to a number of factors which Members might be interested to know.

One was the very strong Singapore dollar, and this is important because approximately 70% of what we consume is imported. The other factor which is important is: we operate a free economy with practically no import duties or excise taxes on items other than petrol, liquor and tobacco. This means that we are able to import from everywhere around the world the cheapest and best goods. Of course, another important factor was the presence of the CPF which removes from immediate consumption some of the high wages introduced in the 1980-83 period.

The second part of the question which was asked concerns whether the cost of housing, including the increase in Housing and Development Board purchase price, is taken into consideration in the computation of CPI. The answer is yes and no. No, because the purchase of houses is not considered as consumption. Therefore, the cost of houses is not factored directly into the CPI. However, the cost of housing is factored in two forms.

Firstly, direct rentals, and the majority would be HDB rentals, would be included in the weighting for the CPI index. For owner-occupied flats or houses, the figure used would be the assessed value, ie, what the owner-occupier pays in the way of assessment or a rent imputed from that which is equivalent. Because the majority of our respondents in the survey actually occupy HDB type accommodation, the housing component of CPI is relatively small and, overall, it accounts for no more than 7% of the CPI weighting.