Inflation Could Hit 5% Early Next Year, Then Taper Off

Source : The Straits Times, Nov 13, 2007

AS CONSUMER prices continue to rise, inflation in Singapore will likely surge to 4 or 5 per cent in the first quarter of next year.

But it should taper off by the second half of the year to 'more normal conditions', said Trade and Industry Minister Lim Hng Kiang yesterday.

The average rate for next year should be around 3 per cent.

Fuelled mainly by rising global oil and food prices, inflation recorded a 13-year high of 2.9 per cent in August. It is expected to dip to 2.7 per cent in the last quarter, Mr Lim told Parliament.

But it was his 2008 forecast that made analysts and consumers sit up yesterday.

Citigroup economist Chua Hak Bin said that the 5 per cent rate predicted would be a 'historic high' in the 25 years since 1983. The previous high was in July 1991, when it hit 4 per cent.

Most economies, including Singapore's, size up inflation by tracking the Consumer Price Index, or CPI. The CPI measures the cost of a basket of goods and services consumed by most households.

Yesterday, Mr Lim cautioned against 'interpreting a rise in the headline CPI as necessarily reflecting an increase in the cost of living'.

It depends on the individual household's spending. 'Switching to cheaper products can reduce the cost of living despite a rise in the CPI,' he added.

A CPI increase may also not reflect actual hikes in consumer prices. For instance, flat prices soared, but flat owners do not pay rent.

Higher inflation, he said, should also be viewed against rapid economic growth, with the gross domestic product rising more than 6 per cent on average since 2003 and wages also on the up.

'Against this backdrop, we should not be surprised to see inflation rise above the unusually low levels seen in recent years.'

However, MPs such as Madam Halimah Yacob worry that residents, especially the elderly on fixed incomes, are feeling the pinch. 'They go to the market with a similar sum of money. But they can buy less,' she said.

Mr Lim promised: 'The Government will continue to keep a tight watch to ensure that inflation remains low.'

He sketched out how the landscape will look like next year.

Explaining why there will be a spike in inflation before it plateaus, he cited two reasons: First, it is as compared to the first quarter of this year, when inflation was at 0.5 per cent and oil prices were low.

Second, the 'one-off' effect of the goods and services tax hike, which will be felt until next June.

Thereafter, the trend will 'revert to more normal conditions in the second half of next year'.

The numbers come against a global backdrop of rising oil and food prices, such as more expensive chicken due to costlier feed. Adverse weather in food-supplying countries has also reduced supply, even as demand has risen.

Diversifying sources is one way to maintain more stable food prices, Mr Lim said, but there was a limit to this given the worldwide increase in food prices being seen now.

But inflation has not affected Singapore's economic competitiveness, he said.

'We are tracking our competitiveness position very closely and so far we are in quite a good position,' he said, adding that inflation here was lower than in other countries.

He noted that imported inflation has been reduced because of the policy of gradually appreciating the Singapore dollar.

Other watchers suggest more aggressive measures. Citigroup's Dr Chua, for instance, believes that the economy is in danger of overheating.

He called on the Government to re-prioritise projects, given that unemployment is already at a low.

'The economy cannot be growing at that pace - it is reaching a bottleneck, there's a supply constraint, with wage, price, rent increases. It is costly for everyone.'