Here's something you won't often read in this column: spare a thought for poor unfortunate Singapore. You see, Singapore was supposed to have got things right, at least as far as monetary and exchange rate policies went. Hong Kong, on the other hand, was widely thought to have got them dreadfully wrong. While Hong Kong chose exchange rate stability as its main policy aim and chained its currency to the US dollar, many economists thought that Singapore had been smarter. Instead of pegging to a single anchor currency, Singapore chose to manage its dollar's exchange rate against a whole basket of currencies. That made a big difference. By fixing its exchange rate to the US dollar back in 1983, Hong Kong was forced to mirror US interest rates. As a result, the Hong Kong Monetary Authority surrendered all ability to keep a grip on inflation. Singapore, meanwhile, kept its exchange rate flexible. That allowed the local monetary authority to steer the Singapore dollar higher or lower against its basket, adjusting the local price of imported goods to keep a lid on the inflation rate. As a result, inflation in Singapore spent most of the past two decades in a stable band between zero and 4 per cent, and in recent years largely between 1 and 2 per cent. In contrast, prices in Hong Kong fluctuated wildly, with the consumer inflation rate climbing as high as 13 per cent in the early 1990s before plunging as low as minus 6 per cent in 1999 as the city struggled to adjust to the Asian currency crisis of the previous year. And it was not just through price volatility that Hong Kong paid the cost of its fixed exchange rate. According to research by the Bank for International Settlements, compared with Singapore, between 1986 and 2006 Hong Kong endured higher as well as more volatile inflation, higher interest rates and higher unemployment. Since the middle of last year, however, Singapore's policy advantage seems to have evaporated. Facing the same sort of price pressures that pushed Hong Kong's inflation rate to a 10-year high of 6.3 per cent last month, Singapore chose to respond by steering its currency higher. Between June 2007 and last week, the Singapore dollar appreciated 12 per cent against the US dollar and 4 per cent against a basket of currencies tracked by Lehman Brothers. Unfortunately, that increase was not enough to contain rising inflation. Yesterday, Singapore's government announced that consumer prices rose 6.5 per cent over the 12 months to February: a higher rate than suffered even by inflation-wracked Hong Kong. The combination of an appreciating currency and rising inflation is an ugly one: it undermines an economy's ability to compete. Since early 2004, Singapore's real effective exchange rate - a measure of competitiveness that factors in both exchange rate and inflation - has appreciated by about a third. That equates to a big loss in competitiveness. Over the same period, Hong Kong's real effective exchange rate has fallen 20 per cent, massively boosting the city's ability to compete internationally. This reversal of fortunes in which Singapore suffers higher inflation than Hong Kong along with declining competitiveness may not last long. But it is pleasant to be able to feel sorry for Singapore for a change.