ONE OF THE things that always surprises me at the supermarket is the price of cheese. Why is it so expensive and why hasn’t a stronger Singapore dollar helped? Sure, it’s an imported, premium food item and yes, it has always been pricey. However, it just seems to be getting more and more expensive.
Like cheese, many things have gone up in price. In fact, so far this year, prices in general are climbing much more than anticipated. In the first two months, the Consumer Price Index grew by 4.7%. Core inflation — which strips out private road transport and accommodation costs — was smaller but still significant at 3.2%. These numbers are less worrying than the inflation numbers we saw last year. But they are still higher than what the experts were predicting, given that not so long ago we were bracing for a slowdown.
To an extent, the uptick in inflation can be explained. For one thing, the economy appears to be swinging back up. The flash 1Q GDP growth numbers, released April 13, indicate that the economy has been chugging along more robustly than most people thought. Government numbers show that the economy grew by 1.6% in the quarter. That’s on a y-o-y basis.
More revealingly, the economy grew by an impressive 9.9%, on a seasonally-adjusted qo- q annualised basis. That was also a stark turnaround from the contraction — yes, contraction — of 2.5% in the previous quarter. So, Singapore not only escaped a technical recession, defined as two consecutive quarters of negative growth, it is bouncing back stronger than most had anticipated.
Let’s look closer at what has been propelling inflation. From the chart, it’s clear that last year, housing and transport were the biggest culprits. The CPI measures price changes in a fixed basket of consumption goods and services commonly purchased by households. Within this basket, the largest component is housing at 25%, followed by food at 22% and thirdly, transport at 16%.
Within housing, accomodation is the largest sub-component, with utilities and fuel making up a much smaller portion. When it comes to food, the biggest sub-component is eating out at food courts and hawker centres. As for transport, naturally the cost of private cars forms the overwhelming sub-component. So far this year, private transport cost pressures have eased compared to last year but housing cost pressures remain stubbornly high. And, the spike in energy prices that we saw early in the year has quickly filtered through.
However, here’s another reason why inflation is not going to go away anytime soon: higher wages. Labour costs have been on the rise and companies are passing them on to consumers. This is the one important takeaway from the Monetary Authority of Singapore’s (MAS) half yearly monetary policy statement released April 13. As the central bank sees it, in the first two months of this year, the rise in core inflation “reflected a more rapid pass-through of higher wage costs to prices of some consumer services”.
This is what economists refer to as “wage push inflation”. As wages rise, employers hike the prices they charge for goods and services in order to maintain their profits. The resulting increase in the cost of goods and services can in turn push wages up to compensate for the rise in prices. Hence, an inflationary spiral is set in motion.
Wage push inflation is likely to linger as the domestic labour situation is pretty tight at the moment, with Singapore at full employment. In fact, the MAS says the pass-through of higher wage costs to consumers is likely to continue for the remainder of the year, although it may occur at a reduced pace. Other inflationary pressures include oil prices. And, private transport costs could also climb further in response to the tight supply of Certificates of Entitlement (COE), especially if car de-registrations remain at current low levels. As the MAS sees it, accommodation and COE costs will together account for as much as half of inflation in 2012.
That suggests that inflation will stay elevated over the next few months. This meant that the MAS has had to revise up its forecasts for inflation by a full percentage point. For 2012, it sees core inflation at 2.5% to 3.0% while for overall inflation, the figure is now 3.5% to 4.5%. Against the backdrop of higher growth and inflation, the MAS says that it will be increasing the slope of the appreciation of the Singapore dollar Nominal Effective Exchange Rate policy band slightly.
To an extent, a stronger currency should help anchor inflationary pressures. However, I seriously doubt it will translate into a cheaper platter of cheese. More than that, savers and investors have something to be even more cheesed off about. With inflation running at 3.5% to 4.5% and interest rates closer to zero, they will be hard-pressed to find returns that beat inflation.
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