SGD Exchange Rate and Inflation

On 1 Feb, the Standard Chartered Bank's Global Research team published a report on inflation entitled Inflation: illusionary, imflammatory.  On page 4 of the report was a table (Table 1) showing CPI inflation data of various countries in Asia.  Part of that table is reproduced below:

	2008 High	Headline	Core	Non-Core	Food/Energy Weight
China	8.7	4.6	2.6	8.3	0.44
Hong Kong	6.3	3.1	1.9	5.3	0.29
Singapore	7.5	4.6	2.1	10.0	0.41

From the above data, we can see that despite its hard USD peg which does not allow its currency to gradually appreciate in order to slow down imported price pressures, Hong Kong has achieved the lowest rates of inflation.

Looking at the Non-Core portion of the inflation data, which includes food and energy prices, the difference between Hong Kong and Singapore is even more remarkable.  Both territories import almost all of their food and energy, so in theory, an appreciating currency ought to ameliorate some of the effects of higher import prices.  Hong Kong imports most of its food from China, whose currency has actually appreciated relative to the USD and HKD, which adds to the cost pressures in the former.  And yet, it has a lower food/energy inflation rate than Singapore.

So unfortunately for us here in Singapore, the much steeper appreciation of the SGD does not appear to have helped as far as food inflation is concerned.

(As an aside, since the trade-weighted index used by the MAS is not public information, I chose to use the USD exchange rate as what I believe to be a reasonable proxy for the strength of the SGD, given that a very significant part of our trade appears to be denominated in USD.)

So it leads me to wonder whether there are domestic factors that have acted to negate the positive impact of an appreciating SGD on the inflation rate.  I have no answers, but it's something to think about, isn't it?