Inflation Risks Remain High: Citigroup

Source : The Business Times, November 6, 2007

CPI may not be capturing full extent of inflation pressures: report

OVERHEATING and inflation risks in Singapore remain high and further monetary tightening may be on the cards, says Citigroup.

Price pressures: There are considerable upside risks from escalating food, energy and wage costs in an economy now at full employment

While recent government remarks suggest that the economy is not overheating, the US bank - in a Singapore Market Weekly report published yesterday - is less sanguine. Indeed, it is 'concerned that inflation pressures are accelerating and that the CPI (consumer price index) statistic may not be capturing the full extent of inflation pressures'.

At 0.4 per cent in September, the rise in the CPI's housing component lags actual steep increases in property prices and rents, Citigroup economist Chua Hak Bin points out. 'These housing costs will show up more visibly next year and could potentially lift CPI inflation sharply to 4 per cent or above in the first half of the year.'

There are also considerable upside risks from escalating energy, food and wage costs in an economy now at full employment.

Other economists have also pointed to rising price pressures and overheating concerns amid robust growth. But the government maintains that the recent spike in inflation to near-3 per cent is due primarily to July's two-point Goods and Services Tax (GST) hike, and that the CPI rise is likely to ease to perhaps 2-2.5 per cent in the second half of 2008.

The Citigroup report concedes that slower global growth next year is likely to cool demand and ease inflation pressures. But for now, the biggest challenge facing the government is overcoming supply bottlenecks and containing overheating pressures, it says. And 'more tightening measures may be in the pipeline' as new data show up the price pressures. 'Some prioritisation and deferment of investment projects may also be necessary to manage demand pressures.'

Citigroup reckons that there is a good chance of 'another move' by the Monetary Authority of Singapore (MAS) next April, as its recent 'slightly' steeper Singdollar appreciation bias 'may be too gentle a move'.

Dr Chua says: 'Prospects of a stronger Singdollar appreciation are therefore likely next year.'

Citigroup also does not expect the Q3 9.4 per cent gross domestic product (GDP) flash growth estimate to be downgraded despite weaker-than-expected September manufacturing data. Stronger services and construction growth will probably provide some offset, it believes.

And despite concerns about the global economy, Singapore will most likely outperform the early official forecasts of 4-6 per cent growth in 2008 - as it has every year for the past four years.