In other words, why is inflation higher than what we have experienced historically, and is monetary policy responding in an optimal way? Implications for Inflation First, it is important to recognise the complex interplay of demand and supply factors underpinning the recent price developments in Singapore. Demand-side pressures on prices have built up as domestic economic activity rebounded strongly from the Great Recession of 2008/09. Regional demand has been firm, supporting the continued expansion of many of our services industries, while strong employment conditions in Singapore have underpinned robust consumption growth for a range of goods and services. Sustained low global interest rates and capital inflows have supported the demand for housing – a point I will return to later. At the same time, supply-side factors have become more significant, with the immediate constraints in labour and housing markets pushing up domestic costs. These reflect structural capacity constraints in the economy. Policy measures are being put in place to help the economy transit to a more sustainable model of productivity-led growth, as Singapore’s reliance on foreign workers is reduced. As the economy adapts and productivity growth rises, price pressures are likely to subside and provide a lift to real wages, making Singaporean workers better off. Implications for monetary policy My second observation is that the monetary policy stance has to be carefully calibrated to take into account the multiple influences on consumer prices. Monetary policy should act decisively to ease short-term inflationary pressures driven by strong demand, through applying an appropriate constraint on overall economic activity.

Established beliefs in efficient markets, asset price dynamics, and more, have all been called into question. Amid the flux in the global financial and economic landscape, Singapore also has its own challenges. Resource constraints mean that we have to restructure the economy to depend less on the labour force and more on productivity increases for growth. During this period of transition, important adjustments in domestic resource costs and consumer prices are taking place, alongside the usual cyclical developments confronting the economy. Dealing with the confluence of factors affecting domestic prices has been particularly challenging, for us at the central bank and equally so for consumers and businesses. CPI-All Items inflation, for instance, has been elevated coming out of the recent financial crisis, averaging 4.1% since 2010, much higher than the historical norm of below 2%. MAS Core Inflation, which excludes changes in accommodation and private road transport costs, averaged a lower 2.0% over the same period. Consumer price pressures have picked up more recently. CPI-All Items Inflation reached almost 5% in Q1 this year and households may face higher price increases for specific expenditure items. MAS is monitoring these and other cost indicators closely. Allow me to take this opportunity to highlight some conceptual issues concerning price adjustments in the  1  Phillips, P, Shi, S and Jun, Y (2011), “Testing for Multiple Bubbles”, Working Paper No. 03–2011, Singapore Management University. BIS central bankers’ speeches  1  economy and their implications for monetary policy.