Confluence Of Factors Feeding Inflation

Source : The Business Times, March 26, 2008

FOR the first time in five months, Singapore’s inflation rate hasn’t surged to a new peak - though, at 6.5 per cent, the February rise in the consumer price index (CPI) is close on the heels of January’s 26-year high of 6.6 per cent. And if not for the September 2007 ‘aberration’, the string of rising inflation numbers every month would stretch back to last July, when the CPI first leapt, mainly because of a two-point jump in the Goods and Services Tax (GST) effective that month.

Still, even with the CPI hitting new heights in the past eight months, the Ministry of Trade and Industry (MTI) maintains that the underlying inflation momentum has been fairly stable over the period. The basis of its contention: not just the raw month-on-month change in the CPI (the February figure, for instance, measured against the preceding January’s) but a smoothed-out three-month moving average (3MMA) of the measure. By this 3MMA, ‘inflation’ picked up in the middle of 2007 and has stayed at around 0.8 per cent since, MTI points out. The underlying inflation momentum is expected to decline during the course of the year, it adds, and inflation for 2008 is forecast at between 4.5 per cent and 5.5 per cent. It’s the second such statement (in two months) of ‘assurance’, as it were, about stable inflation from MTI. While MTI chooses to focus on the month-on-month measure, just about everyone else looks at the inflation rate as it is commonly measured worldwide: the year-on-year percentage change in the CPI

By this measure, there is no question that Singapore’s inflation rate has risen since the middle of 2007 - largely because of global inflationary forces, which are also expected to nudge up the CPI rate a bit more, and keep it elevated for a while. After soaring for months, commodities prices appear, for now, to be taking a little breather. But the latest projections from the United Nations’ Food and Agriculture Organisation indicate that consumers face at least 10 years of more expensive food. A confluence of forces - freak weather, rising demand in Asia, not least high oil prices that raise the cost of every part of the food processing chain - will drive up grain prices ‘for many more years to come’, the FAO says. With the Sing dollar already at an all-time high against the greenback, there could be little room left in Singapore’s only policy tool to rein in imported prices. What is within better control are domestic sources of inflation - which the policymakers must keep close tabs on. Untimely, if not unwarranted, increases in various government fees, service charges or other costs will certainly not help. Neither will a wage spiral fed on expectations of higher pay as consumers feel the strain on their pockets. Maintaining a liberal approach towards the entry of foreign labour and skills will help ease market tightness and nip in the bud any risk of wage inflation. Rather than hope to talk inflation away, Singapore is more than able to deal with the challenges it poses.