A Poke From Public Enemy No. 1

Source : TODAY, Weekend, May 24, 2008

Inflation hits new record high, prompting Govt to raise target

Singapore's economy is growing slower than expected, with inflation overtaking the United States sub-prime crisis as public enemy number one.

Inflation hit a new 26-year high of 7.5 per cent last month, prompting the Government to raise its full-year inflation target to 5 to 6 per cent, from a previous range of 4.5 to 5.5 per cent.



















"Inflation is like somebody poking your rib with a pencil. Now, the pencil is getting sharper with more pencils poking you," said CIMB-GK economist Song Seng Wun.

With exports slowing, first-quarter GDP growth came in at 6.7 per cent year-on-year, below the Government's earlier flash estimate of 7.2 per cent.

"We are facing risks on both fronts, but probably the balance of risks has shifted towards inflation," said Mr Ravi Menon, second permanent secretary with the Ministry of Trade and Industry (MTI).

Singaporeans are being hit by price rises on many fronts — especially food, housing and fuel.

To help keep import prices down, the Monetary Authority of Singapore (MAS) has allowed the Singapore dollar to rise by over 5 per cent against the US dollar so far this year.

However, this comes at a cost. That's because a strong currency makes Singapore exports less competitive abroad.

For now, the authorities appear to believe domestic inflation concerns outweigh fallout from the US sub-prime crisis on the global economy.

"The downside risk of a deeper than expected US recession … remains on the horizon but has lessened slightly in the wake of recent strong actions taken by the Federal Reserve to restore market confidence," said MTI in a statement.

MTI has maintained its 4 to 6 per cent full-year GDP growth forecast for this year, despite a slower-than-expected first quarter start.

Mr Kit Wei Zheng, a Citigroup economist, said: "While the US outlook has improved slightly, higher inflation is now adding a new dimension to the growth risk."

OCBC economist Selena Ling says exporters are facing a "double whammy". Inflation erodes consumers' purchasing power and adds to business costs, which in turns hurts corporate earnings at a time when external demand is slowing.

Still, the Monetary Authority of Singapore (MAS) yesterday said it currently has no plans to review its monetary policy stance after two rounds of tightening to combat inflation.

"We are watching the numbers closely, but at this point of time, there is no inter-policy meeting planned," said MAS deputy managing director Ong Chong Tee.

The Government still believes inflation will moderate in the second half of the year as the impact of last July's two percentage point increase in Goods and Services Tax wears off.