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April 28, 2008 Source: www.AsiaEcon.org At the beginning of 2008, the Singapore economy was expecting to see a rise in the Consumer Price Index of 4 to 5 percent. Based on statistics and data collected so far in 2008, this inflation rate has exceeded that prediction.

April 28, 2008

Source: www.AsiaEcon.org

At the beginning of 2008, the Singapore economy was expecting to see a rise in the Consumer Price Index of 4 to 5 percent. Based on statistics and data collected so far in 2008, this inflation rate has exceeded that prediction.

According to the Department of Statistics (DOS) on a month-to-month change the Consumer Price Index (CPI) for March 2008 rose by 0.1 percent compared to February 2008. On a 3-month moving average month-to-month basis, the Consumer Price Index rose by 0.6 percent in March 2008. Compared to last year, the CPI went up by 6.7 percent due to higher costs of food, transportation and housing. Food prices increased by 7.6 percent, communication and transportation costs by 7.9 percent, health care costs by 7.3 percent, and housing costs by 8.1 percent. The CPI has not been this high since the 7.5 percent hit of March of 1982.

Inflation in Singapore at this moment was mainly caused by the housing value revision, which was following the government’s forecast of 4.5 percent to 5.5 percent inflation rate increase. It caused an 11.1 percent increase in housing costs, which represents 21 percent of the CPI basket. Another main cause of inflation not only in Singapore but in countries such as Vietnam, the Philippines, Hong Kong, Japan, Thailand, and India is the constantly increasing food prices, particularly on grains such as wheat and rice. Furthermore, there is a reduced crop acreage paired with an increased demand on food due to rising living standards.

One of the effects of this record high inflation is a decrease in citizens’ take-home pay. The large pay raises that Singapore workers usually look forward to will be suppressed from now on. This suppression is due to inflation and the surge in prices of oil, food, and lodging. These factors counter-balance the workers’ projected pay rises in a significant way, especially since the rises in inflation have caught a lot of people by surprise. It is also going to affect salary increases for the rest of the year, because inflation was originally expected to be much lower. This is going to cause a lot of trouble for employers, because they will need to provide higher salary increases later on to make up for the low increases this year. Workers should expect and hope their pay to go up by 5 percent, much lower than the estimated 7.3 percent.

The Minister of Finance released a statement outlining strategies to cope with inflation. One of these was moderating imported inflation through the Singapore dollar (SGD) exchange rate policy. In this exchange rate policy, the Monetary Authority of Singapore turns the SGD within a secret-weighted band against a basket of major currencies. This month they raised the central point of the trading band leading their national currency to hit a record high against the USD. Recently it has tightened monetary policy; it allowed a rise in SGD.

Other strategies included diversifying the food sources to minimize a rise in prices from disrupting the supply of one country being imported from, and promoting home ownership, which includes giving subsidies for lower-income families to own a home. The Minister of Finance also recommended providing assistance to Singaporeans who find it difficult to cover the cost of living, and to keep the economy of Singapore competitive and to build capabilities to enjoy good growth.

Additional adjustments were made to the 2008/2009 budget to curb this inflation as well. Some of the measures taken include giving the rich tax cuts while giving the poor handouts to cope with the highest inflation in 26 years. The top income tax rate will not be cut by that much, however, in an attempt to stay attractive to investors. The government expected to keep inflation within 4.5 to 5.5 percent this year, however the cost increase on prices in food and raw materials have exceeded this forecast.

Despite the rise in inflation, growth has rebounded and is doing very well. Singapore’s economy grew at 16.9 percent in the first quarter of 2008, which was higher than economists expected, especially since growth shrunk in the last quarter of 2007. The high growth figures gave the Monetary Authority of Singapore the confidence to tighten monetary policy (more specifically, the exchange rate) in an effort to curb inflation.

Source: www.AsiaEcon.org

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