Inflation hits 5.2% in March 2012

Spike in health-care and education costs
By Melissa Tan, The Straits Times, 24 Apr 2012

INFLATION shot up an unexpectedly high 5.2 per cent last month as vehicle prices and housing rentals continued to escalate while rising wages added to health-care and education costs.

The sharp increase in the consumer price index (CPI), which caught out economists, reverses the trend of moderating inflation seen in the first two months of the year.

Prices rose 4.8 per cent in January and 4.6 per cent in February. The March figure raises the spectre of a further period of painful price rises.

Credit Suisse economist Robert Prior-Wandesforde said yesterday: 'It is by no means impossible that the headline rate hits 6 per cent in April... we believe the central bank's upwardly revised forecast of 3.5 per cent to 4.5 per cent for the year as a whole is in danger of being broken.'

The latest inflation figure also raises the possibility of further moves by the Monetary Authority of Singapore (MAS), which announced last week it would let the Singdollar appreciate at a faster pace.

The MAS may need to allow the currency to rise further, which helps to combat imported inflation, said Citigroup economist Kit Wei Zheng.

But OCBC economist Selena Ling said allowing the currency to appreciate may not help bring inflation down as domestic inflation may continue to rise.

While the usual suspects, car prices and housing costs, were again the main inflation drivers, health-care and other domestic services saw higher than normal price increases, the Department of Statistics report showed.

The cost of private transport leapt 9.6 per cent year-on-year last month compared with 4.3 per cent in February.

Certificate of entitlement prices for cars have risen sharply, hitting $91,000 for larger cars and $57,589 for goods vehicles last week. This suggests another spike in private transport costs for April.

Accommodation cost increases eased from 10.2 per cent in February to 9.8 per cent last month but still remained the single largest contributor to inflation.

Even when housing rents, which form a large part of accommodation costs, were taken out of the CPI gauge, March inflation still posted a 4.1 per cent increase.

Consumers were also feeling the impact of a tight labour market and rising wages.

'More labour-intensive CPI components - health care, education, recreation - have been surprisingly high,' said Bank of America Merrill Lynch economist Chua Hak Bin, noting that about 60 per cent of inflation is imported.

Health-care inflation hit 3.9 per cent last month, largely due to the cost of medical treatment, which was up 5.2 per cent from March last year.

Noting that the health-care sector employed many foreign workers, DBS economist Irvin Seah said the cost increases were due to measures to tighten the inflow of foreign workers. This will raise foreign labour costs, which will get passed on to consumers, he said.

Barclays Capital economist Leong Wai Ho said that the 'costs of medical treatment have risen at a much faster pace in the past four months... a function of wage revisions and higher electricity costs'.

Electricity tariffs were raised by 4.3 per cent on April 1. Doctors in public health care, nurses and other public health staff are also getting pay rises.

The MAS and Trade and Industry Ministry said in a joint statement yesterday that inflation could average about 5 per cent year-on-year in the first half of this year before 'easing gradually' in the second half.

Economists said the easing would be due more to the fact that car price and rental increases probably will not go much higher.

'It's hard to believe COEs can continue to rise at this pace. Surely we're reaching levels where demand is going to be hit hard,' said Mr Prior-Wandesforde, who added that the cooling housing market might soften imputed rentals year-on-year in the second half.

Noting that inflation now appears to have become 'more broad-based than seasonal norms', Citi's Mr Kit said: 'Further tightening in October may prove necessary, especially if the output gap unexpectedly widens over the next two quarters, causing core inflation to remain elevated or even accelerate.'