Beware the curse of full-employment Singapore economy

Tight labour market feeds into higher wages and service costs, says CIMB.

According to CIMB, apart from more expensive housing and car prices, the other source of inflation has been the faster pass-through of higher business costs (rentals and wages) to the prices of consumer services. Among the most affected have been healthcare, education and recreation services.

Last month, the MAS core inflation (CPI excluding the costs of accommodation and private road transport) rose 2.4% yoy vs. Aug’s 2.2% as firmer service costs offset milder food inflation.

"While headline CPI eased to 4.8% yoy for 9M12 from 9M11’s 5.1% yoy, core CPP rose 2.7% for 9M12 vs. 2.1% for the same period. The government expects core CPI to average “around 2.5%” this year and 2-3% in 2013. We expect prices of core items to remain elevated as a tight labour market feeds into higher wages and service costs in the non-tradable sector," said CIMB.

Although growth “could be weighted down by the subdued global economic conditions”, the government still thinks the economy can grow 1.5-2.5% this
year and “at a modest pace in 2013”.

With that assumption and considering the inflationary bias inherent in its policy of restricting foreign labour inflows, CIMB said that it looks like the MAS will be maintaining its policy of a “modest and gradual appreciation of the S$NEER policy band” well into 2013 and beyond given that underlying inflation is well above its comfort zone.