SINGAPORE — An academic experiment involving the price of ice cream has found that Singaporean households that are more exposed to a greater variety of pricey luxurious goods tend to overestimate rises in the cost of living.

On the other hand, their expectations of inflation can be moderated, even if they are increasingly exposed to higher‐priced goods, by giving them information about lower‐priced products, the experiment found.

In a report published on Wednesday (Oct 30), researchers said that when households hold an “upward biased” view on inflation, it could affect how they think about their wages, or influence how retailers set prices. Understanding these expectations is “crucial” to analysing business cycles and formulating monetary policy, they added.

The study was published as a special feature in the Monetary Authority of Singapore’s (MAS’) biannual macroeconomic review on Wednesday. It was done by Low Tuck Kwong Distinguished Professor Sumit Agarwal from the National University of Singapore (NUS), NUS economics instructor Chua Yeow Hwee and Assistant Professor Song Changcheng of the Singapore Management University's (SMU's) finance department.

The researchers took note of Prime Minister Lee Hsien Loong’s National Day Rally speech in Mandarin last year, when he said that items once considered luxury items or those that did not previously exist, such as smartphones, have now become everyday necessities. As a result, standards of living have increased which can put pressure on households.

The researchers said that while it was plausible that changes in the type of goods that households buy could affect inflation expectations, they sought to find out whether exposure to higher-priced products can raise their expectations of rising costs.

In a separate survey by DBS bank and SMU’s Sim Kee Boon Institute for Financial Economics, which was released last week, it was found that Singaporeans have consistently overestimated the MAS’ published level of inflation since the establishment of the Singapore Index of Inflation Expectations (Sindex) in 2014.

The DBS-SMU study found that households expect prices to rise by around 3.2 per cent over the next 12 months, even though MAS officially predicts that headline inflation this year will come in at the lower end of the 1 to 2 per cent range.

HOW THE SURVEY WAS CONDUCTED

The ice cream experiment by the three researchers was modelled after studies by the New York Federal Reserve on consumer expectations. The researchers here conducted street interviews with 1,086 respondents, who were paid S$20 for taking part.

Each respondent was first asked how they thought overall prices would rise over the next year. 

Then, they were given differing information about the prices of two brands of ice cream: Walls, which caters to the mass market, and Haagen-Dazs, which is positioned as a premium brand.

One group was told only the prices of Walls in 2009 and 2019, a second group was told the prices of Walls in 2009 and Haagen-Dazs in 2019, while a third group was given the prices of Walls in both years as well as the price of Haagen-Dazs in 2019. Both brands went up in price about 20 per cent over the 10-year period.

When respondents were asked again for their inflation expectations over the next year, the experiment found that those in the second group, which did not have information on the price changes for the cheaper ice cream, believed that prices would rise faster than what they had previously thought.

The other two groups displayed the reverse behaviour. For the third group, while they have been exposed to the cost of the premium ice cream, they likely had their expectations of inflation tempered because they were aware of how prices changed for the cheaper ice cream.

This suggests that exposure to prices of luxury goods will increase inflation expectations, while having price knowledge of lower-priced products can reduce this bias, the researchers concluded.

“Policymakers could seek to increase the availability of goods at the lower end of the price spectrum to provide households with more choices,” the researchers said. More information on affordable goods should be given in newspapers, notice boards in estates or even mobile phone applications, they added.

“With rising standards of living and exposure to better-quality products, greater awareness by households of the role of changing consumption habits in shaping their perceptions of inflation can help to temper inflation expectations.”