Inflation Up 4.4%, Hits 25-Year High

Source : The Straits Times, Jan 24, 2008

Rising transport, oil, food costs drive up index; economists still positive, though

COSTLIER food, transport and health care drove Singapore’s inflation rate to a 25-year high of 4.4 per cent last month.

This comes amid growing fears that a possible United States recession will drag the global economy into a slowdown.

Economists, however, do not believe the Republic faces the dreaded spectre of stagflation - when an economy becomes stagnant as inflation gets far worse.

The Department of Statistics announced yesterday that the consumer price index rose 4.4 per cent last month from a year earlier. The index was up 4.2 per cent in November.

The index is a key measure of inflation and reflects changes in the prices of a fixed basket of goods and services households commonly purchase.

The rise was the highest since April 1982, but it was largely in line with earlier forecasts.

Key contributors to higher prices included transportation costs, which grew 6.4 per cent, soaring crude oil prices and a hike in taxi fares towards the end of last year.

Food prices went up 5.5 per cent due to more expensive cooked food, fresh fruits and vegetables, and milk products.

At the same time, health-care costs went up 6.3 per cent, reflecting higher charges for daily ward and medical treatment.

Compared with 2006, consumer prices for the whole of last year rose 2.1 per cent, partly reflecting the two-percentage-point hike in the goods and services tax in July.

Market watchers expect this inflationary trend to continue into the early part of the year.

Minister for Trade and Industry Lim Hng Kiang flagged this in November, when he said inflation could hit 5 per cent in the first quarter before moderating in the second half.

Economists Robert Prior-Wandesforde and Prakriti Sofat of HSBC’s Asian Economics team said in a note yesterday that inflation this month could reach as high as 6 per cent.

They cited reasons such as another round of electricity tariff hikes kicking in, as well as higher imputed HDB rents due to the Inland Revenue Authority of Singapore (Iras) raising the annual values of HDB flats.

However, when asked if higher inflation could combine with a potential global economic slowdown in a brutal double-

whammy for Singapore, economists were more upbeat.

CIMB-GK economist Song Seng Wun said the local economy would likely grow next year, albeit at a slower pace than this year.

‘With the construction and services sectors likely to continue growing strongly, gross domestic product is likely to make the minimum 4.5 per cent to 5 per cent growth forecast by the Government.

‘High inflation should continue into the first half, but I expect oil prices to plunge in the second half. This could ease inflationary pressures very quickly.’

Citigroup economist Chua Hak Bin agreed, saying: ‘The inflation we are seeing now is still demand-driven, and I doubt that a lot of prices can stay up if there is an economic slowdown.

‘Oil prices have eased drastically last week, and food prices are stabilising. So, it’s unlikely for us to see any stagflation.’

However, Ms Selena Ling, an economist with OCBC Bank, was more circumspect.

‘A lot of the inflationary factors we are seeing are domestically driven, such as higher taxi fares and the Iras revision of property values, and these will not be affected by a cooling of the global economy.

‘We could see some stagflation on a very small scale, much different from that during the oil shocks some 20 years ago, as the inflation is not in double digits this time.’