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Inflation rises to 2.9% – highest since December 1994

Climbing food prices and higher transport and communication costs drive CPI up

CONSUMER prices rose by 2.9 per cent last month from a year earlier, the biggest increase since 1994, as the effects of the goods and services tax (GST) hike continued to set in.

The August figure came in above the median market expectation of 2.8 per cent.

Economists are predicting that inflation could pick up in the months ahead, with crude oil prices at record highs.

But they do not expect any change in the key monetary tool available to tackle inflation – the central bank’s stance on the Singapore dollar which is up for its semi-annual review next month.

Last month’s increase follows a 2.6 per cent rise in July, when a 2 percentage point hike in the GST took effect.

Climbing food prices and higher transport and communication costs, which together make up nearly half of household spending, helped to hoist the Consumer Price Index (CPI) last month.

Food prices crept up by 3.3 per cent year on year, according to data released by the Department of Statistics yesterday. This is the fastest pace since the 4.7 per cent seen in Jan 1995, noted HSBC economist Prakriti Sofat.

Meanwhile, transport and communication costs rose 3.4 per cent, while health-care costs climbed the most – by 6 per cent.

The acceleration in consumer prices is largely explained by a further pickup in food, housing and transport costs with some further impact of the July GST hike also flowing through, Ms Sofat added.

On a month-on-month basis, last month’s CPI rose 0.3 per cent over July, after increasing 2.1 per cent over June.

For the first eight months of the year, consumer price inflation averaged 1.3 per cent.

Economists are predicting year-on-year monthly inflation to nudge above 3 per cent by the end of this year.

‘In September, we expect to see inflation above 3 per cent as oil prices hit record highs. And the increase in bus fares in October will continue to add to price pressures,’ predicted United Overseas Bank economist Ho Woei Chen, She also forecast inflation of 1.8 per cent for the full year.

She expects the Monetary Authority of Singapore (MAS) to maintain its current policy of a modest and gradual appreciation of the Singdollar at next month’s review.

While inflation is at multi- year highs, DBS economist Irvin Seah believes that further monetary tightening – via a steeper appreciation path – to combat inflation is not on the cards.

‘I think MAS will stand pat for now, because there is a sense that the substantial upward trend in inflation is largely due to the GST hike,’ he said.

A steeper Singdollar appreciation path is more effective in curbing imported inflation, and could hurt Singapore’s exports at a time when the global economy is cooling, said Mr Seah. A strong Singdollar makes Singapore exports more expensive in foreign markets.

‘You will need other non- monetary measures to keep domestic inflationary pressures in check.’

 

Source: The Straits Times 25 Sept 07

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