Inflation in Singapore is caused by both internal and external demand pull and cost push factors. Singapore suffers primarily from demand-pull inflation, which can occur when increases in aggregate demand (AD) persistently exceed that of aggregate supply (AS), which has caused excess demand when the economy is near or at full employment. Inflation, in this case, is due to the increase in AD, which may result from the increase in C, I, G and (XM), thus causing upward pressure on the general price level (LPG). Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay Singapore's main source of demand-pull inflation would be the increase in income of its trading partners, which would lead to increases in the purchasing power of households. This, in turn, causes a greater increase in demand for Singapore's exports. When there is an increase in Singapore's net exports, its AD increases, leading to an increase in LPG. This can be seen when countries like the United States recovered from the 2008 global financial crisis. As one of Singapore's largest export markets, the increase in US national income will lead to an increase in demand for Singapore's exports . Given that the value of Singapore's exports is more than double the size of its national economy, this will have a significant impact on AD and therefore LPG. Additionally, there could also be an increase in foreign direct investment (FDI). This is due not only to the higher expected rate of return on investments in Singapore when external demand increases, but also to the fact that multinational corporations (MNCs) manufacturing in Singapore tend to be export-oriented. An increase in FDI will lead to an increase in AD and upward pressure on LPG prices. Singapore may also face demand-driven inflation from domestic sources. For example, as Singapore's economy recovered after the financial crisis, households' purchasing power increased. Along with the influx of foreign workers arriving in Singapore, this has also increased domestic C and AD, and thus the increase in LPG. One source of inflation pushing up costs in Singapore would be rising global demand for raw materials or goods such as food and oil. This increases the unit cost of production as these raw materials are a major input to production, increasing AS and therefore increasing LPG in Singapore, leading to cost-pushing inflation. For example, in 2012, the average price of crude oil was at historically high levels as OPEC limited oil production. This was a major factor contributing to Singapore's high inflation rate that year, as with little or no substitutes for imported raw materials such as oil, demand for its imports is price inelastic. So LPG increases. Remember: this is just an example. Get a custom paper from our expert writers now. Get a Custom Essay Another cause of Singapore's cost-push inflation would be the government's efforts to reduce the influx of foreign workers. Tightening foreign labor policies has led to the overall workforce growing more slowly than labor demand, resulting in a labor shortage. As the wage rate rises and productivity growth lags, the unit cost rises. Then the AS shifts upwards and leads to cost inflation.