Singapore inflation up 2.8% in 2010

Transport, housing and food were the main drivers to the high CPI inflation.

According to HSBC's Leif Lybecker Eskesen, Chief Economist for India and ASEAN, and Prithviraj Srinivas, Economics Associate, inflation is picking up and the recent reading was not a comforting reading for the MAS. Moreover, inflation is set to stay elevated for a while still.

Of course much is driven by the deliberate policy of limiting the supply of COEs, but the fact that COEs still get bid up and to the current lofty levels is testament to the strong underlying domestic demand in the economy. These strong demand conditions, coupled with capital inflows, are also continuing to push up housing prices, abstracting from the December rebate effect. The exactly why the government saw a need for another batch of property cooling measures, which were introduced earlier this month. However, inflation goes beyond COEs and housing. It is broadening to other categories led by demand-led pressures.

Going forward, tight capacity constraints will translate into rising demand-led inflation pressures, even as growth descends to more sustainable levels. Car prices are likely to remain high and it will still be a while before the property cooling measures have an impact. Coupled with rising international commodity prices, that means the inflation will stay elevated for the foreseeable future.

MAS, in other words, will need to stay in tightening mode and the inflation outlook suggests that they will likely need to tighten further later this Spring to help tame inflation. Fiscal policy should also play a part, supplementing monetary policy efforts.

The inflation reading was stronger than expected. Underlying demand-led pressures will join up with rising
imported inflation to keep inflation readings on the high end for a while. So, the MAS will need to stay in tightening mode and will likely need to tighten further to tame inflation.