Fast facts: Why inflation has been skyrocketing in recent years

Overall data was just at 0.7% during 2000-2007.

According to Barclays forecast, inflation will average slightly below 2% in H1, reflecting a high base of comparison and benign food prices.

It expects prices to start rising in H2. For services cost inflation, Barclays expects it to remain stubborn through the year due to a tight labour market. Overall for 2013, the firm forecasts 2.2% core inflation, a 30bp drop from the average in 2012.

Here's more from Barclays:

Why has inflation in recent years been so much higher than before?

Historical comparisons of Singapore’s inflation rate can lead to the misleading conclusion that inflation has become unanchored and/or that monetary policy has stopped working.

Between 2000 and 2007, overall inflation was very low at 0.7% on average. But since 2007, with the exception of the recession year of 2009, it has averaged about 4.3%.

Core inflation also accelerated post-2007, although by a less dramatic extent. It averaged 3.9% in 2007-08 and 2.1% in 2010-12, compared with 1.2% in 2000-06.

In our view, higher inflation in recent years partly reflected global commodity price trends, given that Singapore is an importer of food and energy, and has no subsidy programs in place.

Indeed, the pace of global food commodity price inflation has doubled post 2007, compared with 2000-06. More importantly, higher inflation is in large part a consequence of government policies – on transport, housing, and labour.

Can monetary policy lower inflation now?

The exchange rate-centred monetary policy is not able to affect house prices and rents, nor prices of COEs – which account for more than half of overall inflation. Instead, the authorities have been relying on macro prudential measures to rein in house prices.

The exchange rate policy works the most directly on imported cost pressures. It can also affect domestic cost pressures indirectly through an impact on export earnings and hence domestic capacity utilisation.

However, the ongoing rise in labour costs is a deliberate policy choice, to foster productivity gains. This structural cost adjustment needs to happen to facilitate the efficient allocation of resources, and should not be entirely offset by policy, in our view.

Will inflation ever dip below 2-3% again?

Barring a deep recession and/or a crash in the housing market, we think it is unlikely that inflation will fall below 2-3% in a sustained way over the next two to three years.

However, from 2015, we believe inflation will be on a lower trajectory for three reasons.

First, accommodation costs should have normalised by then as new housing supply comes onstream and higher interest rates rein in investment demand.

Second, private transport costs are likely to rise at a more normal pace, or could even start to fall outright, as a large number of cars (from the bumper crop of COE supply in 2005-08) start to be deregistered (COEs are valid for 10 years).

Third, prices of consumer services should also come under less pressure from higher labour costs as productivity gains materialise.



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