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Inflation may hit record 4% next year

Citigroup forecast based on further tightening of labour and property sectors

INFLATION may hit a record- breaking 4 per cent in the first half of next year as a red-hot economy adds more strain on the already-tight labour and property markets.

The warning from Citigroup economist Chua Hak Bin also came with a call for the Government to allow the Singdollar to appreciate faster while possibly deferring less urgent major investment projects like the Marina Bay botanic gardens.

‘We maintain that overheating and inflation risks remain high,’ said Dr Chua in a research report out yesterday.

‘The economy is now at full employment, and the cost of hiring foreign workers has now increased considerably given higher accommodation cost.’

Despite greater uncertainty about the global economy, he said Singapore is likely to beat next year’s official growth forecast of 4 per cent to 6 per cent, as it has done so in previous years.

His assessment found backing among other economists while others felt a slowing world economy will keep prices in Singapore in check.

HSBC economist Robert Prior-Wandesforde agreed that the Monetary Authority of Singapore (MAS) may allow a faster strengthening of the Singdollar to curb inflation from imported goods at the next monetary policy review in April.

The tightening carried out last month is unlikely to have a dramatic effect on inflation, said Mr Prior- Wandesforde.

But Action Economics economist David Cohen brushed off overheating concerns, predicting that inflation in the first half of next year should come in at just over 3 per cent.

‘The bigger concern is a potential slowing in the world economy, so it’s a balanced outlook right now,’ he said.

Dr Chua’s report comes a month after Prime Minister Lee Hsien Loong said while there are shortages in office space, the economy, as a whole, is not overheating and inflation is well under control.

The MAS has attributed the rise in inflation largely to a July hike in the goods and services tax rate. It is expecting prices to increase by 3.5 per cent on average in the first half of next year, before moderating in the rest of the year.

‘We are probably less sanguine,’ said Dr Chua.

He said global energy and food prices are rising sharply, driven by record oil prices and adverse weather conditions in farming areas. But bigger challenges lie in the domestic property and labour markets.

Dr Chua said the consumer price index (CPI) is lagging behind the steep increases in property prices and rents.

Housing CPI costs rose 0.4 per cent in September. But official indexes show that residential rents surged 11.4 per cent in the third quarter, while those for commercial space jumped 14.8 per cent.

The labour market is also at its tightest in a decade, with unemployment at 1.7 per cent.

Unlike previous years when the Government could simply let more foreigners in to work, skyrocketing rents mean their wages have to be hiked to cover their housing costs.

Labour costs are thus likely to continue rising after surging 8.5 per cent in the second quarter, said Dr Chua.

 

Source: The Straits Times 6 Nov 07

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