Consumer price inflation rose to 1.0% in 2006, from 0.5% in 2005. All major categories of the consumer price index (CPI) posted price increases with the exception of transport and communications. Higher housing costs contributed the most to overall inflation, reflecting increased electricity tariffs arising from higher oil prices (Chart 11). Meanwhile, the MAS underlying inflation measure, which excludes accommodation and private road transport costs, was also higher at 1.7% in 2006, compared with 1.3% in 2005.
The record-high energy prices had a significant impact on CPI inflation in 2006. With global oil prices averaging US$66 per barrel in 2006 – a 17% increase from that in 2005 – direct energy-related items1 in the CPI basket contributed a significant 0.7% point to overall inflation in 2006. This could be attributed to service providers being more pressured to pass on cost burdens in the fifth year of the oil price run-up. As such, indirect pass-through effects also strengthened with public road transport operators and cooked food operators raising prices, on account of higher fuel costs.
Other cost pressures remain fairly benign. This reflects in part the impact of globalisation, particularly the competitive pressures that continue to be exerted by low-cost emerging economies such as China and India. These, along with the highly competitive domestic business environment, have capped price increases across a broad range of consumer items. Singapore’s open foreign labour policy has also helped to ease the tightness in the labour market, and contain overall economy wage pressures.
In 2007, energy-related items are likely to have a lesser impact on inflation, as average oil prices are not expected to rise sharply from 2006. At the same time, the impending hike in GST from 5% to 7% is estimated to raise CPI i
nflation by 0.4% to 0.6% point each year in 2007 and 2008, although the impact could be partly mitigated by other fiscal measures such as the reduction in road tax and domestic worker levy, as well as the extension of rebates on Service & Conservancy Charges and HDB rentals. Wage costs are also expected to continue rising at a modest pace alongside the increase in employer’s CPF contribution rate.
Overall price pressures in the economy are expected to be well-contained in 2007. Headline CPI inflation is projected to come in at around 0.5% to 1.5% for 2007. With the economy continuing to record broad-based growth at this fairly late stage of the expansion cycle, the MAS will maintain its vigilance against incipient inflationary pressures, including possible upward pressures on business costs.