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Dissipating effects of GST hike will rein in prices of basic goods
 
Singapore’s inflation rate will moderate to about 4 per cent in the second half of the year after a surge to an average of 6 per cent in the first six months.

In its latest half-yearly Macro-economic Review, the Monetary Authority of Singapore (MAS) said the moderation would partly be due to the dissipating effects of the higher goods and services tax.

Released yesterday, the review said the surge in inflation in the second half of last year and the first three months of this year was due to price pressures from abroad and the build-up of domestic costs after several years of strong growth.

The global consumer price index is expected to average 3.7 per cent this year from 3.1 per cent last year. Inflation around the world is projected to be higher in almost all regions due to higher demand for food, oil and other commodities, the report said.

But apart from food and oil, the inflation of imported prices of metals and other primary commodities is likely to remain benign. Any upward pressure on the prices of such commodities - due to growing demand in emerging economies, among other factors - is expected to be offset by the falling prices of electronics and other technology products.

The MAS said inflation would stay high this year due to external and domestic factors. It retained its forecast for the rate to come in at the upper half of the 4.5 per cent to 5.5 per cent range the Government issued earlier.

‘However, there are upside risks to global oil and food prices,’ the MAS said. ‘Even if these prices were to level off, upward pressures on wages and rentals, reflecting domestic capacity constraints, are likely to remain.’

Considering all these factors, along with the low base in the first half of last year, the MAS said inflation could average above 6 per cent in the first six months of the year. ‘In the second half, inflation is expected to taper off to an average of around 4 per cent, partly due to the dissipation of the GST hike effect.’

The MAS also said its decision to allow the Singapore dollar to strengthen earlier this month, while reducing revenues of exporters, would also have a moderating effect on inflation. Exporters will cut back on resources and services like industrial space and labour in response to the toll on their profit margins, it explained.

‘This lowers the demand and income of owners of factors of production…which, in turn, reduces the domestic demand for non-

tradable goods and services.’ As a result total derived demand for resources in the economy eases. This, in turn, moderates inflationary pressures.

Source : Straits Times - 30 Apr 2008