Unit labour costs jumped 4% in Q2 amid higher wages and weak productivity growth

Productivity gains won’t be large enough to counter rising wages.

Although Singapore’s July inflation came in much lower than consensus expectations, the country’s unit labor costs (ULCs), a secondary measure of inflation, still rose 4% in the second quarter amid sustained increases in nominal wages and weak productivity growth.

According to the Royal Bank of Scotland, the upward pressure on ULCs will continue as productivity gains will not be large enough to counter the rise in wages.

“With growth expected to exceed potential for most of the remainder of the year, risks to the inflation outlook too are likely to remain on the upside. Firms are likely to continue to pass more of their accumulated costs to end-consumers in an improving economic environment. Therefore, both demand-pull and cost-push factors are likely to continue to remain as risks,” noted the report.

Here’s more from UBS:

Despite the lower headline print, we do not expect any change to the MAS' policy stance at the upcoming mid-October meeting. Core inflation – MAS' preferred measure of inflation – remains high compared to historical levels. 

Upward pressure on wages is likely to persist with the unemployment rate likely remaining close to 2% this year – a view supported by the hiring intentions component of the business survey index remaining exceptionally strong across all sectors. 

We expect the MAS to keep the slope, width and centre of the SGD NEER band unchanged in October. By our estimates, the NEER is currently calibrated for a 2.25% annualised appreciation, with the band being positioned 1.5% on either side of the midpoint.

The NEER is currently tracking towards the mid of the band where we expect it to linger. We forecast USDSGD at 1.22 by end-2014.