Inflation likely to register 5.3% for March 2011

The headline price barometer which breached the 5% mark is significantly higher than the 1.3% average inflation over the last wo decades, said DBS.

According to the bank's report, the inflation data for March, which is due this week, is likely to register 5.3% year-on-year. The high inflation is mainly driven by high food and oil prices along with persistently high COE prices.

Despite a strong Sing dollar, food inflation is increasing, said DBS's analysts. Oil prices have also continued to escalate despite the gradual stabilization in the MENA political crisis.

DBS believes the strong economic growth in Asia is the prime factor behind this largely demand pull global inflation, which explains why the MAS had to tighten its exchange rate policy for the third time in a year.  

Domestic inflationary pressure has also remained high. Labour market has been tight and unemployment rate is set to dip lower to 1.9% sa in 1Q 2011.

Wages will surely rise, said DBS. Along with hikes in foreign workers' levies and employer CPF contribution rate, such higher labour costs will eventually be passed on to consumers. In addition, although Singapore's output gap has narrowed, it has remained in the positive territory. With that, chance is high hat inflation will remain stuck at an uncomfortably high range of 4.5-5.5% in the coming months before easong off in the second half of the year.