Tuesday, July 24, 2012

Inflation stays stubborn, hits poorer homes hard

Business Times: Tue, Jul 24

[SINGAPORE] Inflation is still not coming down and appears to have hit poorest households hardest in the first half of this year.

Policymakers expect inflation to moderate in the second half of the year after June's rebound to 5.3 per cent, but high inflation makes any loosening of monetary policy dicey, even as slowing growth raises the need to.

The government now expects inflation in 2012 to come in at the upper half of its 3.5 to 4.5 per cent forecast range. June's consumer price index (CPI) was unchanged from a month ago, but the latest year-on-year jump brings inflation for the first half of 2012 to 5.1 per cent.

Inflation's impact on households varies across different income groups, a separate report released by the Department of Statistics (DoS) yesterday shows.

Worst hit were the bottom 20 per cent of households, for whom inflation rose from 5.4 per cent in the July to December period last year, to 6.3 per cent in the first half of this year.

Inflation for the middle 60 per cent income group slipped from 5.4 per cent to 5.2 per cent, while for the richest fifth of households, inflation eased from 5.7 per cent to 4.6 per cent.

DoS emphasised that overall inflation numbers are due to higher imputed rentals on houses occupied by their owners. This does not have an impact on cash expenditures of those who own their homes. Excluding these imputed rentals, inflation was comparable across income groups.

But the poorest 20 per cent of households still saw inflation rising most, from 2.6 per cent in H2 2011 to 4.1 per cent for H1 2012. The middle income group's inflation slipped from 4 per cent to 3.9 per cent, while inflation slowed for the top 20 per cent, from 5 per cent to 4 per cent.

UniSIM senior lecturer Tan Khay Boon noted that lower oil and commodity prices may help lower income households, which tend to spend a larger portion of income on food.

However, the lowest income group also faced higher healthcare cost inflation of 4.3 per cent, compared with the middle and high income households' 4 and 3.9 per cent. "Healthcare cost may increasingly be a burden to the low income group and more assistance in this area may be needed," he said.

Housing and transport costs were the main culprits driving up the CPI by a faster-than-expected 5.3 per cent in June from a year ago. This came after inflation had slowed to 5 per cent in May from April's 5.4 per cent.

This choppy trend is partly because rebates for service and conservancy charges (S&CC) were disbursed to HDB households in April and June last year but not this year, exacerbating cost hikes this April and June. Still, accommodation cost inflation has been stronger than the authorities expected.

"Leasing contracts continue to be renewed at significantly higher rental rates, especially in the HDB segments," the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) said in joint comments yesterday.

Accommodation costs sped up to rise 10.8 per cent year-on-year in June contributing 2.2 percentage points of June's inflation, up from 1.8 percentage points in May. Car prices surged from a year ago but lower petrol prices and ERP charges helped slow the rise in private transport cost, from May's 10.3 per cent to 9.7 per cent in June.

Excluding accommodation and private road transport (which formed two thirds of June's inflation), MAS's core inflation measure held steady at 2.7 per cent for a third straight month.

Sharper spikes in clothing and footwear prices were offset by slower price gains in other segments of the CPI basket. Services inflation slid from 2.9 per cent in May to 2.8 per cent in June, while food inflation slowed from 2.5 per cent in May to 2.3 per cent in June.

"The pass-through of wages and other business costs to consumer prices will continue, but at a more moderate pace," MAS and MTI said. They also expect earlier weakness in global commodity prices to dampen pressures on oil and food items in the near term.

But UOB economist Alvin Liew thinks the recent surge in soft commodity prices, due to parched weather conditions in key farming regions, may lead to higher food prices in the second half of this year.

Barclays economist Leong Wai Ho thinks so too, noting that corn, wheat and soybeans prices are at least 30 per cent higher than what they were at the start of the year.

Food weighs 22 per cent in the CPI basket of goods, compared with accommodation's 20 per cent and private road transport's 11.6 per cent.

Stubborn inflation implies a "tougher balancing act" for the MAS, Mr Leong says. Already, Singapore's growth has slowed, sparking talk of a technical recession and raising the odds that MAS may ease monetary policy in October.

While most economists still expect the MAS to keep policy tight to stem inflation pressures, Mr Leong thinks growth concerns are likely to overshadow inflation, unless coordinated easing by global central banks turns the global economic outlook rosy.

Citi economists Kit Wei Zheng and Brian Tan said in a note yesterday that expected near-term inflation of 4 per cent sets the hurdle high but is "not an insurmountable obstacle for monetary easing", given that weaker growth could set the stage for disinflation next year.

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