Inflation this year could go past 5%

Prime Minister Lee Hsien Loong cautioned yesterday that inflation in the first half of the year could be high. Speaking at the Chinese New Year Celebrations at Teck Ghee Community Centre, Mr Lee said: 'Last year, inflation was about 2 per cent. This year, it could be 5%, maybe even more. Especially in the first half (of the year), it is going to be high.' Earlier government estimates last November had put inflation at between 4% and 5% for the whole of the first quarter of 2008.

Touching on next week's Budget, he said that while the government would have something to distribute, especially to the poor and the elderly, there is a need to be realistic. For its part, the government will help lower-income families through the Workfare Income Supplement scheme. To date, Mr Lee said $150 million had been paid out in Workfare to 290,000 low-income workers for the month of January alone.

Comments: While the CPI was relatively benign in 1H07, the picture all changed in 2H07. On the back of a 2%-pt hike in the GST in July, food supply disruptions, higher energy costs and others, the CPI rose by a seasonally-adjusted 1.9% qoq in 3Q07 and 1.8% in 4Q07, vs. 2Q07’s +0.6% qoq. Barring a sharp downturn in the global economy,
domestic price pressures are likely to persist, due to short-term supply constraints. Festive demand is also expected to lift food prices and the CPI towards the 5% level in the coming months. The CPI is expected to fall within 4.5-5.5% yoy in 1H08 (GST spikeinduced), before trending down to 1.5-2.5% in 2H08. For 2008 as a whole, the CPI is
expected to be 4%-4.5%.

If the current moderation in crude oil prices continues into 2H08, the CPI may be lower than 4%. While the government does not cap prices to contain CPI increases, it gives rebates to public home owners. Bigger rebates are likely to be proposed in Budget 2008, given its stronger-than-projected fiscal position.