Singapore’s major source of external demand-pull inflation isthe rise in income of her trading partners, which lead to the rise of theirhouseholds’ purchasing power and causes an increase in the demand forSingapore’s exports. When there is a rise in Singapore net exports, her ADrises, leading to the rise in the GPL. This can be seen when countries like theUS recovered from the 2008 global financial crisis.
As the US is one ofSingapore’s main export market, when the US’ national income rises, the demandfor Singapore’s export rose. Since the value of Singapore’s exports is morethan twice the size of her domestic economy, there will be a significant impacton the AD and hence GPL.Another source can be the rise of there might also be an increasein Foreign Direct Investment (FDI). Given a higher expected rate of return ofinvesting in Singapore when external demand rises, and the fact thatmultinational corporations (MNCs) which produce in Singapore tends to beexport-oriented, FDIs will be attracted to Singapore. An increase in FDI willlead to a rise in AD and hence on the GPL.Singapore can also face demand-pull inflation from domestic causes.When the Singapore economy recovered from the 2008 financial crisis, the purchasingpower of households rose.
Furthermore, with the influx of foreign workerscoming into Singapore, this also increased the domestic C and AD, and henceGPL.A source of cost-push inflation in Singapore would be theincrease in global demand for raw materials or commodities such as food andoil. This increases the unit cost of production as these raw materials are theimportant factor of production, causing the AS to rise upwards and thereforeraising the GPL in Singapore, leading to cost-push inflation. For example, in2012, the average crude oil price was at historically high levels because theOPEC restricted their oil production. This was a significant cause ofSingapore’s high inflation rate that year since demand for her imports is priceinelastic, and with little or no substitutes to the imported raw materials likeoil, the GPL in Singapore rises.
Another source of Singapore’s cost-push inflation would bethe government’s efforts to cut down the inflow of foreign workers. By tighteningforeign labour policies, it will lead to the overall labour force to rise at aslower rate than the demand for labour, which gives rise to the labour shortageand a rise in the wage rate. With the rise in cost of production, AS shiftsupwards and lead to cost-pull inflation.