Govt Raises Inflation Forecast, Sees Peak In H1

Source : The Business Times, February 15, 2008

Forecast upped to 4.5-5.5% as S'pore feels effect of rising food and oil prices

Singapore's inflation will get worse before it gets better, the Ministry of Trade and Industry (MTI) said yesterday, expecting inflation to peak in the first half of 2008 before moderating in the second half.

The government raised its full-year forecast for the headline consumer price index (CPI) to 4.5-5.5 per cent, from 3.5-4.5 per cent previously.

Rising food and oil prices globally have filtered through to domestic prices of food and oil-related items here, MTI said.

Last year, Singapore's CPI grew 2.1 per cent year-on-year after growing by one per cent in 2006. It hit a 25-year high in December when it grew 4.4 per cent year-on-year. It rose 4.1 per cent for the fourth quarter.

MTI second permanent secretary Ravi Menon noted that part of the increase in the headline inflation here was due to the one-off effect of the two percentage-point hike since last July and technical factors like the revision of annual values of HDB flats.

'We expect inflation to get worse before it gets better,' he said at a media briefing yesterday. 'The revised forecast is premised on fairly high inflation rates in the next few months. This is only to be expected given the very low base in the first half of last year.'

While inflation is expected to taper off in the second half during which the effect of the GST hike wanes, a return to the low inflation rates enjoyed in recent years will not happen any time soon as commodity prices are still likely to rise albeit at a slower pace than in 2007, Mr Menon added.

When asked if the Monetary Authority of Singapore (MAS) would be prompted to change its monetary policy stance given the higher inflation outlook, MAS deputy managing director Ong Chong Tee said the current monetary policy stance 'remains appropriate and the macroecnomic and inflation outlook has been broadly consistent with the planning parameters'.

This policy of a modest and gradual appreciation of the S$NEER policy band has been in place since April 2004.

Mr Menon noted that the current inflation outlook has to be viewed in the context of historically low inflation.

For the last 40 years, Singapore's inflation rate averaged 1.5 per cent, excluding the two oil shocks in the mid 1970s and early 1980s. Average inflation for the past 10 years was half that rate at 0.7 per cent due to the weak global demand in the aftermath of the Asian financial crisis, the downswing of the technology cycle and disinflationary impact from the emergence of China and other economies.

After years of low inflation, the world is now returning to 'a more normal inflation environment,' Mr Menon said.

But he added that the fact that long-term bond yields remain low and reflect that despite the current spike in inflation, the long-term inflation outlook remains low. And as long as jobs are created and wages grow, the impact of inflationary pressures will be dampened.

A recent report released by the Department of Statistics shows that household income has risen faster than inflation. Average household income from work was 32.4 per cent higher than 10 years ago, while consumer prices rose by a smaller 7.6 per cent over the same period.

Ministry of Manpower divisional director (manpower planning and policy) Jeffrey Wong said he expects employment growth to be sustained into 2008, after adding a record 236,600 jobs in 2007.