Red-Hot, But For How Long?

Source : The Straits Times, Nov 28, 2007

INFLATION in Singapore is running at an annualised rate of 3.6 per cent. Trade and Industry Minister Lim Hng Kiang has said it could rise to 5 per cent in the first quarter of next year before moderating. The causes of this spike are many. Partly, it is due to a booming domestic economy. A tight labour market has forced up wage costs and lack of office space has forced up rents. Partly it is due to the rise in the goods and services tax (GST). And partly it is due to global forces - a rise in the prices of oil and other commodities. The last, Singapore cannot do much about; the second, the GST rise, is a one-off thing; and the first, a booming economy, one would not want to wish away.

Abstract economic explanations, however, are of little comfort to the ordinary person. Wages, especially at the low end, are probably not rising as fast as the inflation rate, so low-income households will find it difficult to make ends meet. A number of supermarkets - including NTUC FairPrice, Cold Storage and Prime supermarkets - had earlier pledged to absorb the 2 per cent rise in the GST for six months, but that will expire next month. Among the other organisations that had pledged to absorb the GST increase for a period - including a number of other NTUC cooperatives and SingPost - NTUC Childcare was about the only one that said it would do so for up to a year for low-income families. There is room here for the Government to consider rebates and reliefs targeted at low-income families, either in next year's Budget or earlier, to ease the pain.

Other measures the Government has taken to curb inflation will need some time to show results. For example, it has taken steps to increase the supply of commercial and residential property, but that cannot be accomplished overnight. The chief policy tool the Government has at its disposal is the exchange rate mechanism. The Monetary Authority of Singapore (MAS) has allowed the Singapore dollar to rise against a trade-weighted basket of currencies, thus making imports cheaper. MAS may have to consider allowing the currency to tighten at a somewhat faster pace, bearing in mind the needs of exporters. Those urging the Government to act more quickly or drastically, however, should bear in mind that it is by no means clear the domestic economy will continue to power ahead next year. The US economy may be slowing and a recession there cannot be ruled out. If that were to occur, the Singapore economy will be affected adversely. The Government will have to be careful not to slam too hard on the brakes to cool a seemingly hot economy just when a cooling may already be on the cards.