Inflation to dip with revised CPI

It is tipped to be 2% to 3% this year after change in weightings

THE outlook for inflation this year has been lowered slightly, but mainly because the pricing measure will now be calculated in a different way.

The measure - called the consumer price index (CPI) - assesses changes in the prices of a basket of goods and services commonly bought by the majority of households.

It is rebased every five years to reflect the latest consumption patterns.

This process has resulted in some minor re-weightings for food and other items, but the key change has been to give greater weighting to housing costs.

These costs include utility fees, furniture and housing rents. This category will now comprise 25per cent of the CPI, up four percentage points on the 2004-based system of calculation.

The Department of Statistics (DOS) said yesterday that the change was mainly due to higher expenditure on both rented and owner-occupied housing.

It will also switch to using monthly data on rents to make the CPI more sensitive to cost changes in the housing market. Previously, it used annual value - the estimated annual rent a property could fetch.

This means that changes in housing costs will be reflected in a more 'timely manner', said the DOS.

For instance, under the 2009-based CPI, housing costs rose by 1.7per cent last year. But under the older methodology, a 0.3per cent decline would have been recorded as any rise in housing values last year would have been reflected only in 2010's CPI, when the annual values were changed.

With these changes factored in, inflation is now tipped to come in at between 2 per cent and 3per cent, down from the 2.5 per cent to 3.5per cent previously estimated, said the Ministry of Trade and Industry yesterday.

The Straits Times understands that it was mainly the move to using monthly rentals as a price indicator for owner-occupied housing costs that lowered the inflation forecast.

Other areas of the CPI calculation have also been altered slightly. The share of food has fallen by a single percentage point from the 2004-based CPI, to 22per cent.

Within this category, the weighting for 'non-prepared meals' dropped, while that of 'prepared meals' rose, signalling a growing expenditure on restaurant food.

Weightings for transport, and 'recreation and others' - including expenditure on holidays and government levy on domestic maids - each fell by one percentage point.

The share of education and stationery fell by a similar margin.

Households have increased expenditure on specialised medical treatment, dental services, pharmaceutical products and medical insurance premiums, prompting the health-care share to rise from 5 per cent to 6per cent.

The new 2009-based CPI will cover 6,500 brands and varieties, up from 5,170 in the 2004 composition.

Under the newly weighted CPI, the inflation rate for general households last year was revised to 0.6per cent, north of 0.2per cent under the 2004-based CPI.

Source: Straits Times, 20 Feb 2010