Inflation Rises With Policy Posers In Tow

Source : The Business Times, November 24, 2007

Analysts expect swift counter-measures as monthly numbers climb to a 16-year high

The need for further policy action to stem price pressures - sooner rather than later - has grown with an unexpected surge in October's inflation rate to 3.6 per cent, economists say.

The market consensus estimate was 2.8 per cent. 'We thought we had a high inflation forecast for October at 3 per cent,' said HSBC Bank economist Robert Prior-Wandesforde.

In fact, the latest rise in the consumer price index (CPI) has leapt well beyond these estimates. Climbing from a 2.7 per cent third-quarter average (itself a sharp jump from the first six months' 0.8 per cent pace), it was driven by rising food and oil prices, and is the highest monthly inflation rate since August 1991.

'I don't think it's a one-off (spike) to be ignored,' said Chetan Ahya, chief economist for South-east Asia and India at Morgan Stanley Asia. 'The risks of more policy reaction have increased with this latest data. One more month with figures like these may mean that the government needs to move quickly.' The urgency will be apparent if crude oil prices touch US$120 a barrel, he added.

Most economists believe there will be further monetary tightening via a steeper appreciation of the Singapore dollar at the Monetary Authority of Singapore (MAS)'s next half-yearly policy review in April 2008.

The question, Mr Ahya said, is whether MAS needs to act sooner than April, following its move last month to allow the Sing dollar to rise at a slightly faster pace to help curb imported inflation.

At a media briefing on the Q3 economic data on Monday, MAS deputy managing director Ong Chong Tee said there were no plans for any inter-meeting monetary policy review. The current policy stance of allowing the local currency to strengthen gradually and modestly remains appropriate, he said, though economists have asked, in the light of rising price pressures, if the nudge-up was enough. Yesterday, when contacted, a senior MAS official would not comment.

But Morgan Stanley's Mr Ahya reckons that managing current inflationary pressures calls for the use of not just monetary tools.

While the exchange rate can be employed to deal with 'tradeable' inflation in food, transport and other oil-related items, the bigger cost pressures now stem from demand-induced resource constraints in an economy that has been growing above its potential pace, he said.

There is basically a need to slow demand and economic growth, he reiterated.

For the year to October, consumer inflation averaged 1.6 per cent. The 2007 year-round pace is now estimated at about 2 per cent. Next year, it may well hit 5 per cent in Q1 before easing.

Inflation rates of 4-5 per cent would be high against the muted figures of the last two decades. But inflation in Singapore actually ran past 8 per cent in 1980 and 1981, and averaged over 20 per cent during the 1973 and 1974 oil crises.

While MAS has maintained that, even amid the recent CPI uptrend, underlying inflation has remained steady, Mr Ahya said that, with the persistent climb in the headline figure, core inflation will inevitably and eventually pick up too.

Said HSBC's Mr Prior-Wandesforde: 'Even if inflation is set to fall in the second half of next year, the worry will be that wage growth will rise higher still, leading to second-round effects on underlying inflation.' He believes the government will consider additional cooling measures.

'While denying that the economy is overheating, the government has clearly shown its concerns for the future via the various measures to cool the housing market as well as the delay to several construction projects, an increase in immigration and a contraction in real government spending,' he noted.

And while there is little Singapore can do about rising energy and food commodity prices, cost pressures from a booming economy also reflect strong consumer confidence, in his view.

'The fact that retailers have been able to push through virtually all the GST rise and sustain it smacks of strong confidence in the consumer,' Mr Prior-Wandesforde said. Even with rising inflation, he believes the robust wage growth will be reflected in stronger consumer spending.

'Notwithstanding concerns about the US economy and a wobbly equity market recently, Christmas should be a good one for retailers,' he said.