Inflation hits home hard

January 5, 2008 by admin
Filed under: Current Affairs 

Inflation has become a hot topic amongst consumers suffering from the severe weight of rapid and sizable price increases in consumer goods, household items, food and utilities.

Average prices of milk and bread were 13 per cent and 15 per cent higher in November 2007 compared to November 2006. Prices of pork and items like clothing went up by 3 per cent and 1.2 per cent respectively during the same period.

Trade and Industry Minister Lim Hng Kiang announced last November that the overall inflation rate could hit 4 per cent or 5 per cent in the first quarter of this year.

As usual, lower income households are hit the hardest because the fastest price increases are typically recorded in basic necessities, household items and medicine. Lower income households spend the largest proportion of their income on these items.

High oil prices, which have quadrupled over the past 5 years, are filtering into the economy. Transport companies have used this as an excuse to hike fares despite posting record profits, in effect transferring the burden of rising fuel costs to consumers but keeping the rewards of increased transportation demand as a result of a rising population to themselves.

The recent GST hike from 5% to 7%, as well as monopolistic price fixing by GLCs, have contributed to Singaporeans receiving the short end of the inflation stick.

Inflation however is not just a uniquely Singaporean experience. It has also become a worldwide phenomenon, with European countries and the US having to battle the demon of wealth destruction. The European Central Bank (ECB) has thus far refused to lower interest rates for fear of stoking even more inflation, despite slow growth in the Eurozone area and the potential for the subprime fallout in the US to spread to the Eurozone. The gold price, which typically moves higher when there is excess liquidity in the world economy, has recently recorded all-time highs of over US$860 per ounce.

Profligate spending by US consumers as well as the continual investment of Asia’s large trade surpluses in US assets over the past several years have kept interest rates low and global liquidity at plentiful levels. This in turn has lead to a bull market in financial and related assets such as property. Now however, liquidity-driven inflation may be rearing its ugly head at the exact time when the US and UK are experiencing a credit crunch due to the housing meltdown. This may lead to the stagflation, which is a combination of slow economic growth and rising inflation — typically a lethal combination for financial assets.

Singapore has managed to avoid over-importing inflation from the US by allowing its currency to steadily rise against the US dollar. However, Singapore is generating its own inflation by policies such as GST and price fixing by monopolistic GLCs. If the US economy goes into recession, Singapore will be amongst the first in the line of fire. When that happens, the ugly specter of stagflation could also hit our shores just when lower income Singaporeans are fast approaching their maximum pain threshold in relation to the rising cost of living.

Tags:

Comments

One Comment on Inflation hits home hard

  1. Daily Sg: 8 Jan 08 « The Singapore Daily on Tue, 8th Jan 2008 11:41 am

    2. [...] are fed, up with progress! – Sgpolitics: Inflation hits home hard – Random Thoughts Of A Free Thinker: 只加一点点。。。 [translate: only add just a little [...]

Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!