Mr Lim Hng Kiang's reply to Parliament Questions on Inflation

Question No 442 of Notice Paper No. 290 of 2007

Name and Constituency of Member of Parliament
Mdm Halimah Yacob, Member for Jurong GRC

Question
To ask the Minister for Trade and Industry whether the Ministry is monitoring (i) the increase in prices of food items, such as flour and chicken, and how will this affect consumers; and (ii) the impact of rising inflation on the cost of living.

Question No 446 of Notice Paper No. 290 of 2007

Name and Constituency of Member of Parliament
Ms Lim Swee Lian, Non-Constituency Member

Question
To ask the Minister for Trade and Industry(a) whether the increase in the cost of living, particularly food and milk prices, is a cause for concern; and (b) to what extent (i) has the hike in GST contributed to the increase and (ii) have the GST rebates mitigated the effects of the increase.

Answer
Mr Speaker Sir, inflation in Singapore is on a slightly rising trend.In the third quarter of 2007, the consumer price index (CPI) rose by 2.7% year-on-year, compared to 1.0% in the second quarter and 0.5% in the first quarter. This reflects mainly higher food prices and the one-off effect of the increase in GST in July this year.

The price of food, which is the largest component in the CPI basket, rose by 3.3% year-on-year in the third quarter.However, this third quarter figure does not yet include the most recent increases in the prices of flour and chicken.

Food prices have risen mainly due to dearer imports, arising from disruptions in supply in some of our major food import sources. Adverse weather conditions in Australia, Malaysia and Indonesia have reduced crop yield and supply, raising prices of rice and cereals, vegetables and dairy products. These supply disruptions have occurred against a backdrop of increased global demand for agricultural products, fuelled by rising living standards in emerging economies and higher bio-fuel production.

Diversifying our food supply sources is one way we can reduce our vulnerability to such supply disruptions and maintain more stable food prices. AVA will continue to step up efforts to this end.However, diversification cannot protect us against a worldwide increase in food prices, such as is happening now.

The current uptick in inflation is a global phenomenon. In recent months, rapidly growing economies such as China and India as well as the developed economies, such as those in Europe, have experienced higher inflation. This is mostly due to higher food and energy costs.Oil prices have reached historical highs in recent months, reflecting strong global demand, a relatively tight supply and low global inventories of oil.

The rise in CPI inflation in Singa­pore has also reflected the impact of the GST increase.This was a one-off event that occurred when the GST was raised on 1 July 2007.On a month-on-month basis, overall CPI has reverted back within the range recorded in months before the GST increase.It increased by 0.3% in August 2007 and fell 0.3% in September 2007.But because of the way the CPI is calculated, the GST increase will continue show up in higher CPI inflation figures for 12 months until June 2008, though to diminishing extents. More importantly, unlike food import prices, the GST increase has had only a limited impact on basic food prices as the major supermarket chains have been absorbing the GST increase for basic food items.

To mitigate the impact of the GST increase on the cost of living, the government introduced the GST Offset Package earlier this year. The GST Offset Package will more than offset the impact of the higher GST on lower income families. Middle-income Singaporeans have also enjoyed substantial benefits such as GST credits, utilities and rental rebates.

The pick-up in inflation in Singapore should also be viewed from the perspective of the rapid economic growth over the last three years.GDP has grown by more than 6.0% on average since 2003. Growth has also been broad-based, across all sectors of the economy. Wages have also been growing, especially last year and this year.Against this backdrop, we should not be surprised to see inflation rise above the unusually low levels seen in recent years.

We should also be wary of interpreting a rise in the headline CPI as necessarily reflecting an increase in the cost of living.First, the CPI measures average changes in prices across all households.Whether there is an increase in the cost of living for a particular household depends on that household’s spending patterns.Switching to cheaper products can reduce the cost of living despite a rise in the CPI.

Second, an increase in the CPI can sometimes reflect technical factors rather than an actual increase in prices faced by consumers.Take for instance the revision in annual value of HDB flats announced by IRAS this morning. The adjustment in annual values will translate into a notional increase in imputed rentals of owner-occupied HDB flats, and hence raise the CPI in the coming months. But as HDB flat owners do not pay rentals on the flats they own, they will not experience higher inflation as a result of this revision in annual values.

One important way the Govern­ment helps to keep inflation low in Singa­pore is through our monetary policy, i.e. the policy on the exchange rate of the Singa­pore dollar.In recent years, MAS has been maintaining the exchange rate on a modest and gradually appreciating path. This strengthening Singa­pore dollar has helped to reduce imported inflation.If we had pursued a different exchange rate policy, such as one pegging the currency to the US dollar, Singa­poreans would have experienced higher inflation.

Mr Speaker Sir, Singapore’s overall inflation is rising but is still low by international standards and in the context of the healthy growth in incomes that we have seen in recent years. The government will continue to keep a tight watch to ensure that inflation remains low.