ECONOMY | Staff Reporter, Singapore

Warnings as inflation smashed through 4.1% in May

And industrial production fell 7 % - is this a new stagflation ?

DBS says inflation will stay above the 3% mark for the rest of the year.

Here’s more from DBS:

Headline inflation data for May as well as industrial production index for the same month is on tap this week. The reading of the price barometer will most certainly bring some sigh of relief for policymakers amid the rising downside risk to growth.

CPI inflation is expected to report a 4.1% YoY increase, down from 4.5% in the previous months. Base effect from the high COE prices will gradually get eroded away, leading to lower transport CPI inflation. Moderations in both global fuel and food prices in the month may also bring about lower food and energy related inflation.

That said, inflation will stay above the 3% mark for the rest of the year. Higher labour costs will eventually get passed on to end consumers. A tight labour with unemployment rate at 1.9%, below the full employment level, will drive wages higher. A stricter foreign labour policy along with hikes in employer CPF contribution rate will surely contribute further to wage inflation. The risk is that such wage driven inflation pressure could prove to be more persistent and roadbased.

Latest employment data has shown that there are more jobs available than unemployed person. Specifically, there are 1.39 job vacancies for every one unemployed person. The upward pressure on wages and consequently on inflation will be the key factor keeping inflation above the historical norm going forward.

Separately, industrial production growth due on Friday is expected to report a decline of 7.0% YoY. Compared to the healthy non-oil domestic export sales increase of 7.8% in the same month, there appears to be a gap between production growth and sales. Essentially, a positive price effect brought on by higher refined petroleum prices and weaker Sing dollar have inflated nominal export value. Conversely, high production base in the same period last year has depressed the YoY production growth figure. Apart from these factors, inventory destocking is another reason that will widen the gap between output and sales.

Nonetheless, the supposedly paltry headline production growth has masked a somewhat slightly more optimistic outlook. Month-on-month change in production is expected to report a strong 7-8% expansion and that should put an end to the concern about the immediate drag from Japan, high oil prices and double dip recession in the developed economies.

Plainly, economic fundamentals across Asia are expected to hold up despite tighter monetary policies whereas the resilient consumption growth in the US will continue to sustain its recovery. Overall economic outlook will look a lot brighter if ones look beyond the current soft patch in the second quarter.  

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