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IS THE worst over? That is the question on many Singaporean’s minds as prices have stabilised recently after choking inflation in the first few months of the year.

But if one heeds the words of Finance Minister Tharman Shanmugaratnam, the prospect of a sustained respite is still some way off as another wave of inflation could hit if the global economy does not play its cards right.

In fact, one can all but kiss goodbye to the days when Singapore’s inflation was kept below 2 per cent. According to economists Today spoke to, inflation is the new proverbial beast that governments must perpetually tame. And it would run wild again if the authorities take their eyes off two crucial factors: Oil prices and wages.

:The Government expects inflation in the second half of the year to be lower, as the effects of last July’s Goods and Services Tax hike wear out. However, it is not ruling out revising upwards its inflation forecast of 5 to 6 per cent.

“Inflation is going to prove more persistent, both in the short and long-term, than a lot of people, including most of the central banks, are factoring in right now,” said HSBC senior economist Robert Prior-Wandesforde, who expects inflation to ease off only in the second quarter of next year, at the earliest. He estimated that inflation would hit 6.5 per cent for the year.

Noting that the first round of inflation was triggered by the high costs of “almost everything” especially raw materials, :CIMB-GK regional economist Song Seng Wun added: “At this point, we probably cannot tell how severe or not the secondary effect may be … “It’s a lot easier to push through the secondary effect if the underlying labour market is very robust and growth momentum remain strong. Whether the secondary effect is fairly modest or strong depends on all these conditions.” :

At a unionist conference last week,Mr Tharman cautioned employers against offering higher wages to offset inflation - the second time in three weeks that the minister flagged concerns of a “second round of inflation”.

Earlier, he had urged Asian countries to tighten their monetary policies to curb inflation, otherwise inflationary pressures would be stoked, setting off another round of rising prices in the region.

The experts point fingers at China, India, Indonesia and the Philippines, which have recorded double-digit inflation as real interest rate goes into negative and money supply and credit continue to grow at a faster pace.

:Central banks in Asia generally took a “too-relaxed view of inflation” and mistook the initial inflationary pressures as “a supply-side phenomenon that wouldn’t last”, Mr Prior-Wandesforde noted.

:He added: “The Asian financial crisis and the weak growth for a period after that probably encouraged this kind of ‘go for growth’ policies: ‘See what kind of growth rates we can achieve, and worry about the inflationary consequences later’.”

While sound monetary policies could mitigate the inflationary pressures, governments can do little about the surging oil prices, which Deutsche Private Wealth Management Asian strategist Chua Hak Bin described as the wild card in the equation.

Said Dr Chua: “It all depends on how oil behaves. If tensions in the Middle East get worse … you can get a spike in inflation.”

Even in the absence of such a drastic scenario, oil prices would continue to have a latent impact on inflation - in more ways than one.

Noting that oil prices in countries such as Malaysia and Indonesia are “still way below market prices”, in spite of recent fuel subsidy cuts, Dr Chua pointed out: “There is still a risk that future adjustments would drive inflation higher.”

Domestically, the high oil prices are having a direct impact on the Consumer Price Index (CPI), which measures inflation. Transportation costs are a major component of the CPI and ComfortDelGro, the largest taxi operator, recently announced diesel surcharges with all other taxi companies expected to follow suit.

Another round of public transportation fee hikes are also expected after the Public Transport Council unveiled the latest fare formula, Mr Song noted.

At the same time, governments around the world are keeping a nervous eye on wages in order not to be caught in a wage-price spiral.

Such a vicious cycle occurs when employers and workers try to keep up with inflation to protect real incomes, further driving up inflation in the process.

Earlier this month, European Central Bank president Jean-Claude Trichet warned that European nations are already seeing the first signs of a wage-price inflation spiral.

:Asia has also not been spared. While countries such as the Philippines and Indonesia are most vulnerable, “we shouldn’texempt Singapore from this spiral risk” given that the Republic experienced a double-digit wage growth in the first quarter of the year, Mr Prior-Wandersforde reiterated.

:He added that to mitigate such a risk, Singapore has to raise productivity in tandem with wages to help workers cope with the higher cost of living.

:Still, Mr Song felt Singapore was less likely to fall into a wage-price spiral, “given the tight labour market conditions and relatively strong underlying fundamentals”.

“:In the context of Singapore, there is a smaller risk, especially if the external environment continue to be uncertain,” he said.

Source : Today - 18 Jul 2008