Inflation likely to peak at record 8.1% this month: Economist

Source : Straits Times - 12 Jun 2008

IT MAY appear unstoppable, but inflation in Singapore is likely to peak this month - but at what could be a record 8.1 per cent - before moving down to about 3 per cent next year.

The prediction - from Mr Cem Karacadag, the director for non-Japan Asian economics at Credit Suisse - was in line with forecasts from government and private sector economists, although a tad higher.

It also assumes that oil prices will remain at around US$130 per barrel.

Mr Karacadag said inflation was being driven by a variety of factors: rising food and oil prices, the knock-on effects from a hike in the goods and services tax, and the housing boom in January.

He believes that if oil and food prices stabilise, inflation will return to moderate levels, but there will be pitfalls.

‘The risks are that the oil price spike in May has not fully transmitted its effects, and that food prices might continue to increase despite recent drops in prices, as the effects from the previous months’ hikes continue to elicit an effect,’ said Mr Karacadag.

He also cited the effects that costlier raw materials could have further along the production chain, including pushing up prices.

The high inflation afflicting the country could cause real gross domestic product growth this year to slow to 5.5 per cent - within the upper half of the Government’s 4 per cent to 6 per cent forecast range.

This fairly optimistic estimate is based on the strong momentum in domestic demand, underpinned by high employment, rising wages and the mega-construction projects under way.