Inflation set to rise above forecast

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Jan 26, 2011
Inflation set to rise above forecast

Analysts expect figure to be higher than MAS' forecast of 2% to 3%
By Fiona Chan, Assistant Money Editor

A SUSTAINED rise in the costs of food, cars and labour could push Singapore's inflation rate above what the Government has predicted for this year.

This raises the possibility that the Monetary Authority of Singapore (MAS) may further tighten monetary policy in its upcoming April review, letting the Singapore dollar appreciate faster to counter rising prices. A stronger Sing dollar makes imports cheaper, helping to offset increases in import prices.

The MAS has forecast inflation to come in at 2 per cent to 3 per cent this year.

But economists say inflation, which hit a two-year high of 4.6 per cent last month, is likely to remain above 4 per cent in the coming months and this could cause the full-year figure to edge past the 3 per cent mark.

Economists from Credit Suisse, Nomura, Bank of America Merrill Lynch, OCBC and DBS all anticipate that inflation will average 3.2 per cent this year.

DBS economist Irvin Seah expects inflation to stay above 4 per cent in the first half of the year and even test the 5 per cent mark, as global food prices breach all-time highs and oil prices rise amid growing demand from countries such as China and India.

'I'm quite surprised that the MAS says this year's inflation will be 2 per cent to 3 per cent,' he said. 'My own forecast is 3.2 per cent and I see upside to that.'

Citigroup's Kit Wei Zheng expects inflation to average 'slightly higher than 4 per cent' in the first quarter of the year and to stay between 3 per cent and 4 per cent until about June.

The pace of price rises looks likely to 'remain above the MAS' implicit medium-term comfort threshold of around 2 per cent and possibly breach the top end of 3 per cent', he added.

Higher commodity and oil prices could add about one percentage point to inflation this year, with wage inflation putting on another percentage point, Mr Kit said.

Car prices are another major culprit: a 33.8 per cent surge in Certificate of Entitlement premiums to record highs last month may contribute another 0.5 to 0.6 percentage points, he added.

An even higher forecast comes from CIMB economist Song Seng Wun, who is pegging full-year inflation at 3.5 per cent.

'Food prices are likely to come in on the high side and now universities say school fees are going up too,' he said. The costs of education and stationery climbed 2.7 per cent last year, according to data from the Department of Statistics on Monday.

Higher inflation, coupled with strong economic growth momentum from last year carrying on into the first quarter of this year, 'would certainly be grounds for the MAS to tighten policy further', Mr Song said.

Rapid growth creates more demand for goods and services, which in turn leads to price pressures. Tightening policy to rein in inflation tends to put a damper on economic growth, but this is less of a worry if the economy is healthy.

However, not all economists are sounding the alarm on inflation.

'It's early days yet,' said OCBC economist Selena Ling, although she is also tipping 3.2 per cent inflation this year.

'There's a lot of talk about food and energy inflation, but oil prices don't look like they can break through US$90 a barrel decisively, and on the food side our sense is that it's not a broad-based rise in prices across all countries.'

fiochan@sph.com.sg


My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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