24th Jan 2008
By JOHN JANNARONE
SINGAPORE -- Singapore's inflation hit a 25-year high in December, creating fresh pressure to tighten policy just as the island braces for an economic downturn.
The consumer-price surge, led by both import costs and a robust property market, is expected to persist through this year, but the Monetary Authority of Singapore may find its hands tied if the U.S. slips into recession.
The consumer-price index, a measure of costs for noncore goods and services, rose 4.4% from a year earlier after rising 4.2% in November, the Department of Statistics said yesterday. The rise was the fastest since April 1982 and higher than the 4.3% increase forecast by economists polled by Dow Jones Newswires.
Costs of food and energy continue to fuel inflation across Asia, but economists say central banks must also weigh the likelihood of a slowdown in global demand.
"Inflation through the region is going up, but it's not clear when the U.S. economy will bounce back," said Prakriti Sofat, an economist at HSBC in Singapore. "Central banks can't ignore either factor."
The government has forecast economic growth of between 4.5% and 6.5% in 2008 -- less than the 7.5% clip posted in 2007 -- but analysts say that target won't hold if the U.S. economy falters.
Tuesday's surprise move by the U.S. Federal Reserve to cut the federal funds rate by 0.75 percentage point could further complicate matters for Singapore as the island's low interest rates fuel rising asset prices. The Monetary Authority of Singapore uses exchange-rate targeting to control prices because import costs are a key driver of inflation, and consequently gives up control of interest rates.
The yield on the two-year Singapore government bond dropped more than 0.1 percentage point in trading yesterday.
"Singapore needs to deal with the effects of lower interest rates that result from the Fed's move," said Joseph Tan, senior strategist at Fortis Bank in Singapore.
He said inflation in Singapore has averaged 0.9% over the last 10 years, but the central bank predicts consumer prices will rise between 3.5% and 4.5% this year.
Transportation costs were a leading driver of overall inflation in December, increasing 6.4% from a year earlier due to more expensive gasoline and a rise in taxi fares. Mr. Tan said Singapore might follow the lead of China, which recently instituted price controls to stem a surge in commodity costs.
"It goes against free-market theory, but Singapore could do what China's doing," he said. "The government could step in to keep taxi fares from rising any further."
Month-to-month, the CPI gained 0.5% in seasonally adjusted terms, surpassing a forecast for a 0.3% rise. For the year, the CPI gained 2.1% in 2007 after rising 1% in 2006.
http://online.wsj.com/article/SB120111735387410667.html?mod=googlenews_wsj
