Inflation forecast remains at 3-4% for 2011

MAS Core Inflation for the whole year will be 2-3 per cent, said the MAS.

The Singapore economy saw a step-up in the level of economic activity in the first quarter this year following a slowdown in H2 2010.

According to the Advance Estimates released by the Ministry of Trade and Industry today, Singapore’s GDP expanded by 23.5% on a quarter-on-quarter seasonally adjusted annualised basis in Q1 2011. The expansion was broad-based across the trade-related1 and services sectors, reflecting an improvement in final demand.

The expansion was broad-based across the trade-related and services sectors, reflecting an improvement in final demand.

The global economy is expected to grow at a moderate pace in 2011, notwithstanding the increased uncertainty arising from the spike in oil prices and the calamity in Japan. Supported by a gradual improvement in the labour market and accommodative fiscal measures, the US economy should continue on its recovery path. In Asia ex-Japan, resilient household spending and a pickup in business investment are expected to underpin growth. In Singapore, while a temporary slowdown is forecast for Q2, economic growth is projected to be sustained across a wide range of industries for the rest of the year. Reflecting in part the robust expansion in Q1, GDP growth for the year as a whole is likely to be at the upper end of the 4-6% forecast range.

CPI inflation rose from 3.4% in Q3 2010 to 5.2% in the first two months of 2011, while MAS Core Inflation2 remained at around 2%. The increase in headline inflation was largely due to a sharp rise in COE premiums and imputed rentals, but the contribution of these two factors will ease as base effects dissipate. However, wage pressures have been building up amidst a tightening labour market. Although the pass-through of wages to services costs has been relatively muted so far, the pass-through could strengthen given firm economic conditions. On the external front, global oil and food prices have increased and will remain high. Taken together, headline inflation is forecast to stay elevated and will moderate only gradually to around 3% by Q4 2011. For the whole year, CPI inflation is expected to come in at the upper half of the 3-4% forecast range3 while MAS Core Inflation will be 2-3%.