Singapore’s CPI-All Items inflation rises to 5.3% in June 2012

Higher side of 3.5-4.5% due to pricier cars, housing

By Aaron Low, The Straits Times, 24 Jul 2012

THE Government now expects inflation is likely to come in at the higher end of its official forecast this year, after prices rose faster than expected last month.

Initially, it had forecast that inflation was likely to ease in the second half of this year and come in between 3.5 per cent and 4.5 per cent for the year.

But car prices that are likely to stay high due to the smaller supply of certificates of entitlement and pricier accommodation have prompted the Government to tweak that estimate.

It now expects inflation to come in 'at the upper half of the 3.5 per cent to 4.5 per cent forecast range'.

It still expects inflation to ease off in the next few months.

Inflation came in at 5.3 per cent last month compared with the same month last year, beating May's 5 per cent, the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry said yesterday.

Costlier accommodation and higher private transport costs were the main drivers of the faster-than-expected pace of price increases, accounting for two-thirds of inflation.

The MAS also noted that service and conservancy rebates helped to lower the cost of housing in June last year, but there were no rebates last month, which explained part of the higher inflation.

Core inflation, which excludes accommodation and private road transport, stayed firm at 2.7 per cent last month, unchanged from May.

Barclays Capital economist Leong Wai Ho said part of the persistently high core inflation is the result of a tight labour market and higher foreign manpower costs.

'This is a reminder that adjustments to manpower costs due to foreign labour policy changes remain a source of upward price pressures and will keep core inflation above its historical average of 1.8 per cent for some time,' he said.

Economists added that the persistently high inflation will heighten the policy dilemma for MAS when it decides on monetary policy in October.

The central bank has traditionally strengthened the Singapore dollar to fight inflation, but the slowing economy - which contracted 1.1 per cent on a quarterly basis in the April to June period - calls for an easing of the policy to support economic growth.

But it was a separate report from the Department of Statistics that had economists worried about the social impact of inflation.

The department said the lowest 20 per cent of income earners were the worst hit by inflation in the first six months of the year.

Inflation for this segment rose by 6.3 per cent, but only 4.6 per cent for the top 20 per cent of income earners. The rate was 5.2 per cent for the middle 60 per cent.

Much of the higher inflation experienced by the lower income group stemmed from strong rises in imputed rentals on owner occupied accommodation.

This is a statistical measure which reflects how much a household would pay if it were renting the home based on market rates.

As many Singaporeans own their own home, this measure does not have an impact on the cash expenditure of most households, the department said.

Still, even if imputed rent is stripped out, inflation was at 4.1 per cent for the lowest income group, higher than the 3.9 per cent rate for the middle income group and 4 per cent for the top earners.

DBS economist Irvin Seah said he was worried about the impact as 'expenditure is a big part of a low wage household's income'.

The question is whether incomes can keep pace with inflation, noted Citigroup economist Kit Wei Zheng. With the economy slowing, the 'bargaining power of workers, including low income workers, could be dampened', he noted.

In May, unionists pushed for the National Wages Council to recommend that low wage workers earning up to $1,000 monthly enjoy a minimum built-in increment of $50 this year.

The suggestion, which is meant to offset inflation, was adopted by the council.