Singapore inflation falls to its lowest in 2 years

25-Sep-2012

Singapore's inflation fell to its lowest level in nearly two years last month as the slowing economy dampened the pace of price increases.

The August level of 3.9 per cent is the slowest pace since November 2010, and a shade below the 4 per cent recorded in July.

Core inflation, which excludes private road transport and accommodation, and measures price increases of everyday goods and services, fell to an 11-month low of 2.2 per cent.

The slowing inflation means the central bank will likely tweak the exchange rate policy next month.

Economists said the Monetary Authority of Singapore (MAS) will continue allowing the Singdollar to appreciate, but at a slower pace than before, as it focuses on tackling the prospect of slower growth.

A weaker Singdollar will help exporters cope with the falling demand for their products amid the global slowdown.
But while inflation is on a downward trend, MAS and the Ministry of Trade and Industry (MTI) warned yesterday that there could still be spikes ahead. Take certificate of entitlement premiums.

They surged last month and will lift this month's inflation numbers, MAS and MTI said.

Transport costs rose 6 per cent last month, while housing costs were 6.1 per cent higher.

The government expects inflation to average between 4 per cent and 4.5 per cent for the year, still almost double the 30-year historical rate of about 2.2 per cent.

But yesterday's figures did indicate that, at least for now, the high inflation of about 5 per cent seen over the past two years is over.

CIMB economist Song Seng Wun expects monthly inflation to fall to about 3 per cent by the end of the year due to the cooling economy.

One reason why inflation is still above historical rates is that wage costs are being passed on to consumers.

"The tight labour market and foreign worker policy is likely to keep inflation elevated, even as it declines," said Mr Song.

"Services, where the manpower crunch is greatest, are still experiencing rising inflation."

Health care costs rose 5.1 per cent, while education costs were up 3.3 per cent.

One complicating factor that could distort inflation is the onset of monetary easing by central banks in recent weeks, known as quantitative easing (QE).

The policy, aimed at supporting the economies in the United States, Europe and Japan through infusions of cash into the financial system, is likely to result in a flood of funds into the region, possibly lifting prices of assets such as property and commodities.

But Bank of America Merrill Lynch economist Chua Hak Bin believes the probability of higher inflation here from QE is low, given that the global economy is still weak.

He noted that MAS is not expecting commodity prices to spike as food inflation remains stable at 2.3 per cent.

"QE is unlikely to have immediate impact on the near-term inflation," he said.