Derailed: Shock as transport costs rise 9.5 % in a year

Overall inflation in the 12 months to October 2010 came in at 3.5 % but analysts warn wage pressure remains a risk.

Commenting on the inflation figures, Singapore's local bank DBS said Essentially, the move towards the 4% level, as predicted by many, is not going to be a “hard and fast” one. Base effect is one factor, and the pre-emptive monetary tightening by the central bank in April and October is another reason why inflation will not rush towards the 4% mark. Yet, domestic inflationary pressure is certainly building up from the still booming property market and wage pressure from an increasingly tighter labour market, as well as from hikes in foreign worker levies. Companies will surely have to factor in such increases in their cost components and their pricing behaviour at some point in time. In addition, though imported inflationary pressure has been relatively subdued for now, rising asset, commodity and food prices, along with capacity constraints and capital inflows are stoking regional inflationary risks. And this could have some unwanted spillover effects on domestic inflation going forward.

Our simulation now suggests that November inflation will bounce back up to 3.7%, before the year-end festive demand pushes inflation beyond the 4% mark in December. Full year inflation will read 2.8%, which is almost double the historical average of 1.5%. And as we had predicted back in June (see “A year of two halves” dated 30 Jun10), inflation has indeed become the story for the second half of the year. However, the bad news is that high inflation will persist and headline readings will stay range-bound between 3-4% in the first half of 2011. Thankfully, the central banks in the region already have their eye on inflation and inflows. For that, we can expect more monetary tightening measures and various forms of capital controls to keep inflation from increasing.