Coming To Grips With Inflation

Source : The Business Times, October 25, 2007

WHILE laments about rising business costs are pretty much a perennial complaint from the business sector, over the last 10 years and more, consumer price inflation has virtually been a non-issue in Singapore; since 1995, the annual rate has barely breached 2 per cent.

But there is now growing concern about rising costs - both on the consumer and business fronts - and particularly about the impact on the average Singaporean as well as the economy at large. The concern is not misplaced, even if the Department of Statistics (DOS) maintains that there has been no uptick in inflation in the two months since the 2-point increase in the Goods and Services Tax in July.

To be sure, the one-off GST hike is the primary reason for the leap in the Consumer Price Index (CPI), from a 2007 first-half average of 0.8 per cent, to 2.6 per cent in July. It's important to note that the tax hike merely brings a one-off rise in price levels. Still, the July CPI figure is no 'blip' - going forward, the inflation rate will probably hover around this level, until mid-2008 when the effect of the GST increase disappears from the year-on-year comparisons.

As it turns out, the CPI increase picked up to 2.9 per cent in August, and then eased to 2.6 per cent last month. And prices actually dipped, by 0.3 per cent, from August to September, following a rise of the same magnitude from July to August. The months leading up to July saw similar CPI changes - which has the DOS pronouncing 'no uptick', that inflation has remained stable.

Be that as it may, other factors are at play to nudge the CPI - and other cost indices - upwards in recent and coming months. Top of the list would be record-high oil prices, which crossed US$90 a barrel last week. The spiral effects of surging oil prices reverberate across the entire economy, especially for oil importers like Singapore, and eat into corporate margins.

But while oil prices grab the headlines, economists warn of a possibly more insidious source of imported inflation: escalating global food prices. Particularly for non-food producers like Singapore, there can be little, if any, escape or respite.

Already, in September, the food component of Singapore's CPI - the biggest item at 23 per cent - rose 3.7 per cent as the costs of fresh vegetables, fruits, seafood, milk powder, as well as hawker and restaurant food, went up. Also, market forecasts indicate that the spike in global grain prices - the key trigger of the rise in global food price inflation - is not about to ease anytime soon. And food accounts for a bigger portion of the lower-income groups' household spending.

Adding to the inflationary pressures are otherwise positive factors associated with an economic boom: a tight labour market, rising wages, rising rentals, scarce capacity. Allowing a faster pace of currency appreciation will help contain rising imported inflation. Exporters may cry foul, but the alternative could be worse: an overheated economy with (by Singapore standards) intolerably high inflation.