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Wages lead costs in pushing inflation up

March inflation rebounds to 1.2%, pushes core inflation to a higher 2% on base effects and rising costs

[SINGAPORE] Higher domestic costs - particularly rising wages - are now pushing prices up, and are expected to continue to do so over the rest of this year.

Economists say that this has begun to show up in Singapore's monthly consumer price inflation, which accelerated slightly more than they had expected to 1.2 per cent last month on the back of higher food, healthcare, education, recreation and other services costs.

These also pushed core inflation to 2 per cent last month, from 1.6 per cent in February, to overtake overall inflation for a fourth consecutive month. Economists observed that this is in line with the price outlook articulated by the central bank last Monday, when it decided to keep the Singapore dollar appreciating to keep domestic cost pressures in check.

Headline inflation's rebound to 1.2 per cent from February's four-year low of 0.4 per cent was widely expected, though a shade stronger than the 1.1 per cent median forecast of 19 economists polled by Bloomberg before yesterday's data release.

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The pick-up was “mainly on account of a smaller fall in car prices” as the high base effect a year ago dissipated, the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) said in joint comments on yesterday's data release. The cost of private road transport fell 2.8 per cent from a year ago and was less of a dampener on March's inflation than it had been in February's, when it corrected a sharp 7.1 per cent.

That made private transport the only major category in the CPI basket of goods whose prices fell last month, though prices of oil-related items, when grouped together, also fell a marginal 0.3 per cent year-on-year. All other key categories saw stronger price inflation, apart from accommodation, whose costs grew a slower 1.7 per cent, after rising 2 per cent in February.

Accommodation and private road transport are excluded from MAS's definition of core inflation, which is intended to measure the economy's underlying price level. Core inflation thus rose to a higher 2 per cent than the headline rate of 1.2 per cent.

Some of what contributed to higher core inflation, such as a 2.9 per cent increase in food prices last month - faster than the 2.3 per cent increase in February - could be put down to the dissipation of February 2013's high base, distorted by the Chinese New Year. Such base effects were also behind the steep 2.9 per cent increase in prices of non-cooked food such as fruits, vegetables, dairy products and rice last month, compared to February's 1.4 per cent.

But OCBC economist Selena Ling thinks that the impact of higher domestic costs on prices is also apparent in March's inflation report.

She noted the 3.4 per cent increase in healthcare costs - driven by pricier medical and dental treatment and more expensive medical health insurance, as well as the 3.4 per cent increase in tuition and other fees.

Also, MAS and MTI said that services inflation - which captures services-related items across the CPI categories - moderated in February to 2.1 per cent, but rose back up to 2.4 per cent in March due to larger increases in the cost of household services and holiday travel.

"Domestic cost pressures, particularly stemming from a tight labour market, are likely to remain the primary source of inflation," the authorities said yesterday.

Last week, MAS already identified an intensified pass-through of wages and other business costs as the main reason for the pick-up in core inflation in recent months.

This is likely to persist, given that the labour market remains tight and another round of foreign worker levy hikes is due to add further to labour costs this July, said UOB economist Francis Tan. "As Singapore's economy remains resilient and rides on the global economic recovery, firms will enjoy better pricing power and are more likely to pass on cost increases to their customers."

And it is the services-related businesses for whom wages form a higher share of costs - such as those in healthcare, cooked food, education and recreation - which will be the first to pass their cost increases on to customers, he said.

Meanwhile, the impact of another recent policy change has shown up in the inflation report. Alcoholic drinks and tobacco costs rose 4.1 per cent year-on-year and 3.7 per cent month-on-month in March, after excise duties were raised 25 per cent for all types of liquor and 10 per cent for cigarette and manufactured tobacco products at the end of February.