Relief finally in sight?

Prices holding steady but don’t pop the bubbly yet: Economists

ECONOMISTS rubbed their eyes in disbelief yesterday as official data showed that for the third month in a row, inflation held firmly at 7.5 per cent last month instead of climbing.

Does this spell a plateau in consumer prices, which are currently at a 26-year high? Maybe not, said some pundits, as June enjoyed some once-off relief and certain wildcards – oil and food – remain.

According to the Department of Statistics, the consumer price index (CPI) last month rose 7.5 per cent from a year ago, exactly the same as it has since April and slower than market expectations of 8 per cent.

“I had to double check to make sure my eyes not were lying when I saw the headline number,” said CIMB-GK economist Song Seng Wun.

Cheaper cars helped offset higher prices for food and electricity. But there were other exceptional factors: A one-time rebate for service and conservancy charges and the Great Singapore Sale.

As a result, June’s CPI – which measures price changes in a basket of goods and services commonly used by households – fell 0.3 per cent from May.

Data for the following months are likely to look similarly heartening – largely due to a technicalfactor related to the Goods and Services Tax (GST).

When the GST went up by 2 percentage points from July 2007, prices were logically higher compared to the previous year when there was no such hike. This month, however, the so-called GST effect will wear off and possibly push down CPI by 1 to 1.5 percentage points, estimated HSBC economist Robert Prior-Wandesforde.

Further dampening the inflation rate for the month would be the recent drop in pump prices. Over the past fortnight, petrol stations have cut prices three times in line with falls in crude oil prices. If such cuts continue, consumers will have reason to cheer.

Inflation for the first half of this year is 7.1 per cent, which the Government expects to ease in coming months to reach a full-year figure of between5 and 6 per cent.

But private-sector economists are less optimistic, cautioning instead, of persistent risks.

“We see elevated food and energy prices keeping CPI inflation at 26-year highs,” said Mr Song, who predicts full-year CPI to reach 6 per cent. Crude oil prices are known to be volatile, while global food supplies are at the mercy of the weather.

Singapore buys two-thirds of its food imports from Malaysia, whose recent fuel price hike of as much as 40 per cent will indirectly raise food prices.

Also, consumers are likely to pay more for transport, said United Overseas Bank economist Ng Shing Yi, as more Electronic Road Pricing gantries become operational, and with taxi, bus and train operators set to raise fares.

Which means that even though July’s inflation rate is expected to slow, due partly to the fading of the GST effect, don’t be too hasty to conclude that the downtrend will continue.

In fact, “what the average man on the street wants to see is prices coming down. That means the inflation figure has to be negative”, said National University of Singapore’s Associate Professor of Economics Tilak Abeysinghe.

Source : Today – 24 Jul 2008

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