Singapore January Inflation Rate Rises To Hit 6.6%

Source : The Business Times, February 26, 2008

But economists don’t expect further monetary tightening in April

The inflation rate surged to another 25-year high of 6.6 per cent in January - and is not expected to ease for a while yet.

Still, most economists do not expect further monetary tightening in April, citing growing concern on the government’s part about the impact of an overly-strong Singapore dollar on exports. Instead, the Monetary Authority of Singapore (MAS) is expected to maintain a ‘modest and gradual appreciation’ of the trade-weighted nominal exchange rate at its next policy review.

Higher costs of not only food but also housing and transport weighed on the consumer price index (CPI) last month, according to figures released yesterday.Related link: Click here for the Department of Statistics’ press release

The latest data prompted the Ministry of Trade and Industry (MTI) to issue a statement saying that the 6.6 per cent jump in the CPI - up from December’s 4.4 per cent, which was also a 25-year high then - is ‘consistent’ with the official inflation forecast of 4.5 to 5.5 per cent for 2008 as a whole.

The January high not only comes off revised annual values of HDB flats, it also reflects a low base 12 months earlier in January 2007 when the inflation rate was only 0.3 per cent.

According to MTI, the month-on-month CPI numbers - particularly when smoothed out to remove the monthly volatility - give a better picture of the underlying trend.

And the three-month moving average of the month-on-month inflation rates has hovered around 0.8 per cent since picking up sharply last July when the Goods and Services Tax (GST) rate was raised by two percentage points.

January’s 0.8 per cent pace by this measure largely reflects the global inflation in food and energy prices that has persisted through the past seven months, MTI says.

Maintaining that there has been no surge in the core rate of inflation since last July, MTI says: ‘Inflation momentum has neither accelerated nor abated in January 2008.’

The year-on-year inflation rate should ‘moderate significantly’ in the second half of 2008 as the effects of the low base and one-off factors wear off, but underlying inflation will likely ease more gradually, pending external price trends, it says.

But economists track the standard year-on-year CPI measure, and most see inflation staying high in the near term.

DBS Bank economist Irvin Seah reckons that even with the GST effect out of the picture from the second half onwards, fundamental price pressures will remain.

Apart from high food and oil prices, domestic price pressures will be kept high by short-term job market tightness and with rising rents, Mr Seah writes in a recent report.

He forecasts: ‘Inflation now looks set to average 5 per cent in 2008, with core inflation lifted to 3.7 per cent.’

Despite the uptick, Mr Seah and other economists - taking a cue from Finance Minister Tharman Shanmugaratnam’s remarks about Singapore’s inflation strategy in his recent Budget statement - do not think that MAS will further increase the Sing dollar appreciation slope at the next review.

One exception is Goldman Sachs economist Mark Tan. He thinks that the recent fiscal easing and falling interest rates will provide a buffer to economic growth and has given MAS room to further tighten its policy stance.