Monetary Authority of Singapore Annual Report 2012/2013
Anchor of Economy

THE ECONOMY — GLOBAL, REGIONAL AND DOMESTIC

Domestic Factors Kept Inflation Elevated

Singapore’s labour market remained tight in 2012, with the overall unemployment rate falling to 2%, the lowest since 1997. This was due to strong labour demand to meet capacity expansion in infrastructure and essential services, as well as a more restrictive foreign labour policy. While resident wage growth was dampened by the generally sluggish economic environment-it slowed to 2.3% last year, from the 5.8% average in the preceding two years-the decline in labour productivity led to a further build-up in business cost pressures.

MAS Core Inflation, which excludes the costs of accommodation and private road transport, averaged 2.5% in 2012, up from 2.2% in 2011, as businesses continued to pass on some of the cost increases to consumers. CPI-All Items inflation, while moderating from 5.2% in 2011, remained elevated at 4.6% in 2012, due to higher residential property rentals and car prices. These reflect persistent tightness in the housing rental market and smaller COE supply, respectively. (Chart 2)

As the economy transits towards more sustainable, productivity-driven growth, the labour market will face continued constraints which will lead to further increases in domestic business costs. On the other hand, imported inflation will likely be subdued, given favourable supply conditions in the global commodity markets. Taking these factors into account, both MAS Core Inflation and CPI-All Items inflation will be lower in 2013 compared to last year.