Trend for Singapore's Inflation Rates

Ms Tan Su Shan asked the Minister for Trade and Industry (a) whether Singapore's inflation rates will decline and whether this will reflect the underlying cost of living in Singapore; and (b) whether the tight labour policies will continue to drive structural inflation higher and keep price pressures elevated for a longer period.

Mdm Speaker, the consumer price index

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(CPI) inflation declined from 5.2% in 2011 to 4.6% last year. In the first two months of this year, inflation further moderated to an average of 4.2%. Over the same period, CPI less imputed rentals on owner occupied accommodation, a measure which relates more directly to the actual cash spending of households, was lower at 3.7%.

In terms of the drivers of CPI inflation, the two largest contributors last year were accommodation costs, particularly imputed rentals on owner occupied accommodation, and car prices. Nevertheless, housing rental growth has slowed more recently and, if sustained, would lead to a slower pace of increase in accommodation costs. Certificate of Entitlement (COE) premiums have also moderated with the recent policy changes to tighten car loans, although they remain volatile and would need to be monitored closely. In all, we expect accommodation costs and car prices to account for around three-fifths of inflation this year.

Imported inflation is expected to be benign this year. In particular, food price inflation moderated from 3.1% in 2011 to 2.1% in 2012, and further to an average of 2% in the first two months of 2013. Similarly, in tandem with a decline in global oil prices from the peak in March 2012, prices of oil-related items, including fuel and utilities, have trended downwards since the second half of last year. In the first two months of 2013, the prices of oil-related items were 0.8% lower on average compared to a year ago.

Another driver of inflation is services costs. We recognise that as the economy restructures towards productivity-driven growth, tight labour market conditions may lead to an increase in wage costs during the transitional period. In turn, this could exert upward pressure on the prices of some consumer services, especially those with high labour content. However, as the Government is helping companies to defray some of the wage increases over the next three years through the Wage Credit Scheme, the pass through of higher wages to consumer prices is likely to be dampened. The Government is also committed to helping companies raise productivity through the various productivity initiatives. In the longer term, with productivity gains, firms will be able to afford higher wage costs and cope with higher business costs, without having to pass on the increased costs to consumers.

Taking into consideration the above factors, MTI and MAS expect CPI inflation for the whole year to come in at 3.5% to 4.5% at this stage. The forecast will be reviewed in the upcoming MAS' Monetary Policy Statement on 12 April.

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I thank the Second Minister for the reply. Madam, the CPI figure for February was 4.9% and that is going up from a very high base last year. My follow-up question is: is the Government or policy-makers differentiating between long-term structural issues such as a tighter wage market as well as higher rentals across the market versus the short-term tactical changes of lower COEs or lower prices caused by loan curbs? For example, just raising wages will not necessarily lead to productivity rises in the long term. If our structural labour policy leads to structural inflation, will this be a long-term sticky issue for Singapore and Singapore businesses?

Madam, I thank the Member for her supplementary question. The question really pertains to how we look at the issue of inflation and we have to look at it in totality. Whilst we can talk about long-term and short-term movements, it is the aggregate that impacts the overall CPI number and any other measures of price inflation.

Having said that, the Member used the term "structural" several times. By that, she means that there could be a wage cost price spiral, and I think that is the thrust of her question. I want to emphasise that it is not axiomatic that just because wages increase that prices must go up, and inflation must be a consequence, because the key elements here are whether those wage increases are underpinned by productivity and other enhancements in the economy. That is why in our measures, we are not just talking about support for wage increases by companies, which is an important part of the transition process, but also a key part of the strategy is to work on productivity at the national level, at the sectoral level and at the company level. So, we have to look at the real economic outcomes as well as the impact on prices through wage increases in order to draw a conclusion over a longer term. It would be too early to conclude that wage increases per se, as a result of our tighter labour market, will lead to longer term inflationary trends.