Introduction
In 2022 consumer prices in Singapore increased by 6.1%, the fastest inflation rate since 2008. This surge was largely fuelled by the global economic recovery and disruptions to international supply chains. Using AD-AS analysis, both forces can be traced through their effects on aggregate demand and aggregate supply.
Aggregate demand
The post-pandemic global rebound saw rapid recovery across major economies such as the United States, China and the European Union. As global incomes rose, foreign demand for goods and services increased, particularly from small, open economies like Singapore that rely heavily on exports. This surge in external demand raised Singapore's net exports (X minus M), a major component of aggregate demand, shifting the AD curve rightward from AD0 to AD1.
Beyond exports, global optimism and improving sentiment also lifted domestic consumption (C) and investment (I). As households felt more secure in their employment and incomes, they spent more on goods and services. Businesses anticipating future growth were more willing to invest in new capital, technology and infrastructure. The combined increase in C, I and X led to a significant rise in AD, raising real national output from Y0 to Y1 and pushing the general price level from P0 to P1.
This demand-pull inflation arises when the economy operates closer to or beyond its productive capacity and firms respond to excess demand by raising prices.
Aggregate supply
While demand was rising, the supply side faced serious constraints from global supply chain disruptions. Key issues included labour shortages due to illness, border controls and quarantine rules; shipping delays and container shortages from port congestion and uneven reopening of economies; and rising costs of raw materials and intermediate goods, especially in electronics, energy and food.
Singapore, highly dependent on imported raw materials, capital goods and food, was significantly affected. The increase in the cost of imported inputs raised firms' overall cost of production, particularly in manufacturing and logistics-intensive sectors. These higher costs shifted the short-run aggregate supply (SRAS) curve leftward from AS0 to AS1. Firms were less willing or able to produce at previous output levels without passing on costs to consumers, pushing the general price level from P0 to P2 while output fell from Y0 to Y2.
This reflects cost-push inflation, where inflation is driven not by excess demand but by rising production costs that squeeze profit margins and reduce the willingness or ability of firms to supply goods at prior prices.
Conclusion
On the one hand, the economic rebound increased aggregate demand through higher export revenues, consumption and investment. On the other hand, supply chain disruptions constrained aggregate supply by raising production costs, shifting SRAS leftward. The combination of rising AD and falling SRAS generated strong inflationary pressures, explaining why Singapore experienced its fastest price increase since 2008.