Inflation takes breather, economists hold breath

Published 24 May 2011
The Business Times
By Emilyn Yap

Headline inflation eases, but price pressures still lurk

The Republic’s headline inflation eased to 4.5 per cent in April, going below 5 per cent for the first time this year.

Transport costs rose 11.7 per cent in April 11
Transport costs rose 11.7 per cent in April 11

This backs the official forecast of how inflation could have peaked in the first quarter. But some private sector economists remain on guard and are watching out for more upward price pressures ahead.

The Department of Statistics said yesterday that the consumer price index (CPI) rose 4.5 per cent year on year in April as the costs of transport, housing and food went up.

Transport costs jumped 11.7 per cent because of more expensive cars and petrol. Housing costs went up by 5.1 per cent, and food prices gained 2.9 per cent.

Month on month, the CPI inched up by 0.3 per cent in April, driven largely by higher costs of transport, food, and recreation and other items.

April’s headline inflation, while slightly higher than the median market forecast of 4.4 per cent, is the lowest so far this year. The CPI rose by 5.5 per cent over the year to January, and 5 per cent in both February and March.

Across the first quarter, prices were up 5.2 per cent. The Monetary Authority of Singapore (MAS) has said that inflation should have peaked then, and should ease gradually to around 3 per cent in the fourth quarter. It sees inflation for the whole year hitting the upper half of its 3-4 per cent forecast range.

‘The latest inflation figure confirms that headline inflation has peaked and we expect inflation to moderate for the rest of the year,’ said Citi economist Kit Wei Zheng.

However, there are signs that some inflationary pressures are only just kicking in and have not been fully offset by the appreciation of the Singapore dollar, he added. ‘Headline inflation did not moderate as much as we had expected and core inflation is rising.’

Core inflation, which strips out accommodation and private transport costs, rose 2.2 per cent year on year in April. This is higher than March’s 1.8 per cent.

That core prices ‘trekked up noticeably should keep the MAS on a hawkish watch over lingering upside risks to inflation’, said HSBC economist Leif Eskesen.

He cited higher wages from a robust job market and cost-push pressures from food and fuel as some factors to watch.

The question now is whether another round of monetary policy tightening will be needed. ‘Should the pipeline of data in the coming months continue to point towards further comfort zone in growth and less so for inflation, further policy tightening would be on the table in October,’ Mr Eskesen said.

But UOB economist Chow Penn Nee believes further action is unlikely with MAS’s recent tightening efforts and the expected moderation in headline inflation for the year.

MAS has let the Sing dollar appreciate at a faster pace since April last year to cap rising prices. It shifted the exchange rate policy band upwards in its latest review last month.

In the past year, the Sing dollar has climbed by more than 11 per cent versus the US dollar. It weakened slightly to S$1.248 against the dollar yesterday, according to Bloomberg data, as Europe’s deepening sovereign debt crisis heightened risk aversion.

A rising Sing dollar helps to curb inflation by making imports cheaper, but it also makes Singapore’s exports less cost competitive. A stronger currency may have an impact on industries in general but the impact has not been significant, said MAS deputy managing director Ong Chong Tee last week.

Inflation has become a hot potato not just in Singapore, but across Asia. Fresh data yesterday showed that Hong Kong’s composite CPI rose by 4.6 per cent over the year to April, higher than March’s 4.4 per cent.


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