Economists cut their full-year inflation forecasts

20130528-st-economists-cut-full-year-forecast-pic THE dramatic plunge in Singapore's inflation rate in April has led some bank economists to slash their forecasts for full-year inflation to below official projections.

But they also warned that the pace of price rises could creep up again later this year - and consumers are likely to feel this sting in a wider variety of everyday costs.

Overall inflation sank to a three-year low of 1.5 per cent last month, largely owing to successful policies to curb house and car prices, which have driven the surge in inflation in recent years.

Lower car costs likely shaved 0.9 percentage point off inflation, while cheaper housing, helped by Housing Board service and conservancy charge (S&CC) rebates, took off another 0.7 percentage point, estimated Credit Suisse economist Michael Wan.

Mr Andy Lim, 58, who is self-employed in the construction industry, said he did not feel the impact of lower inflation last month but enjoyed the S&CC rebates: "The rebates definitely helped. We saved about $40."

While the Government still expects overall inflation to come in at 3 to 4 per cent this year, several economists have reduced their inflation tips to below 3 per cent.

Citi economist Kit Wei Zheng's new projection of 2.5 per cent implies that overall inflation "could average 2.1 per cent for the rest of the year, taking into account a slight edging up of certificate of entitlement (COE) premiums".

But before that, the recent fall in COE prices means inflation this month may be even lower than last month's 1.5 per cent, said CIMB economist Song Seng Wun.

With car and home prices no longer surging, overall inflation is likely to converge with core inflation, a measure that better reflects out-of-pocket expenses.

The gap between the two fell last month to its lowest since April 2009, said Barclays economist Joey Chew. Overall inflation was 1.5 per cent; core was 1.4 per cent.

What this means is that while overall inflation has fallen, Singaporeans who are not buying houses or cars may not see much difference in their daily expenses.

Lower oil and food prices will help ease some costs.

But as businesses are forced to pay higher salaries amid the tight labour market, they might start passing on more of these costs to consumers.

As a result, core inflation is likely to pick up in the second half of this year, the Monetary Authority of Singapore said last Thursday.

Already, unit labour costs jumped 8.7 per cent in the first quarter of this year over last year.

This "underscores the wage pressures on profit margins and core inflation", Citi's Mr Kit said. If growth picks up, more companies may hike prices, he added.

But not all firms will do so. Said Dr Chye Chuan Hee, resident dental surgeon at Victoria Dentalcare: "Rising costs of rental and labour have affected us like most other businesses, and medical devices and materials have also been getting more expensive.

"But we can't just pass on costs, we have established good rapport with our patients."

That is good news for consumers like homemaker Wendy Choo, 55. "Compared to last time, things are still getting more expensive," she said. "But it's been a gradual increase over the past few years, not a sudden jump in prices."

Source: Straits Times, 27 May 2013