INCREASE IN COST OF LIVING

INCREASE IN COST OF LIVING:

1\. Mdm Halimah Yacob asked 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.

2.:

Ms Sylvia Lim asked 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.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, may I

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have your permission to answer Question Nos. 1 and 2 together?

Mr Speaker: Yes.

Mr Lim Hng Kiang: 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. 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 prices and

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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 1st 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 to 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 our 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

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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, ie, 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 our Singapore dollar 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.

Mdm Halimah Yacob (Jurong): Sir, two supplementary questions. Some economists have said that the CPI might still

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have understated the real inflationary pressures with the full effect yet to be filtered into consumer pricing. Another economist has also projected that inflation will hit 4% in the first half of next year. Can I have the Minister's comments on this, please?

Second, if inflation continues to rise, will there be other measures that the Government will put in place to help the vulnerable people such as the low-income and the elderly to cope with the cost of living?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I have explained in my answer earlier, our CPI has been low for the first quarter and second quarter this year. The first quarter was 0.5% and the second quarter was 1%. It rose to 2.7% in the third quarter, and we expect the fourth quarter to be around 2.7% or even slightly higher. We expect the first quarter of next year to reach the peak of between 4% and maybe even 5%. This is because of the base effects of the first quarter of 2007 where we had very low transport CPI because of the changes that we made in our transport policies. We had low oil prices because in January/February 2007, oil prices were around US$50. By the end of this year and next year, we expect oil prices to be within US$90 or so and also because the effect of the GST increase continues on, as I mentioned, up to June 2008.

We are aware that the headline CPI numbers will show an upward trend for the fourth quarter and also for the first half of next year. But we expect the trends to revert back to more normal conditions in the second half of next year. But even so, we expect the 2008 CPI numbers to be averaging around 3%. It will be higher than what we have been experiencing in the last few years.

Ms Sylvia Lim (Non-Constituency Member): Mr Speaker, Sir, earlier the

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Minister mentioned that diversification of our food supply sources is one way to stabilise food prices. I wonder if he could elaborate on whether the Government is looking at other sources of supply that we have not hitherto tapped on and what are these sources, and whether there is a chance that this will help us to stabilise food prices. Secondly, have we fully exhausted our potential for local production of food?

Mr Lim Hng Kiang: Diversification of our supply sources is a general strategy, especially for food. Take, for example, the most recent increases in the third quarter where we saw a big increase in vegetable prices. This is largely because of the supply conditions in Malaysia and Indonesia. Obviously, if we can widen our sources of vegetable supplies to Thailand and China, this of course would mitigate the local supply disruptions that we face from Malaysia and Indonesia.

On the other hand, if there is a worldwide increase in prices, for example, in corn feed, you will expect chicken prices to go up. Even though we are diversifying our sources of frozen chicken, not just from Australia and the US but also from Brazil - it is a very competitive source for chickens - but because of the worldwide increase in corn feed, we will expect even frozen chicken prices to go up. There is a certain extent that we can go in diversifying when it helps to mitigate local disruptions but, if it is a worldwide increase, I am afraid that we do not have that cushion.

Mr Inderjit Singh (Ang Mo Kio): Sir, I have two questions for the Minister. First of all, does the Minister see any impact on our competitiveness as far as businesses are concerned? Is inflation on the general cost increases affecting our ability to attract investors in the long run? Second, what is it that is going to happen that is going to make the second half inflation

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come down, according to the Minister's forecast?

Mr Lim Hng Kiang: We are tracking our competitiveness position very closely and, so far, we are in quite a good position for several reasons. First, as I explained earlier, our inflation rate, even though it is higher than what we have been experiencing, is still lower than in other countries. In that sense, comparatively, we are still better off.

Second, even though wages had gone up last year, particularly the first three quarters of this year, we must see wages in the context of the last five to seven years where wages had not gone up so rapidly. So I do not think we should begrudge our workers for having their fair share of a wage increase in the last two years if we look at the broader 5-7 years' timeframe. But, more importantly, it is the productivity that we have been able to achieve. In the end, we have to look at the unit labour cost and not just wage increase. If we track the unit labour cost, we are still relatively well-off. We are watching these numbers closely but, right now, it has not affected our competitive position.

The reason why we estimate that inflation will tail down in the second half of next year is because of the base effects that I explained earlier. First, we had the GST increase which will continue, in technical terms, to be reflected in the CPI up to June 2008. So in the second half of next year, the effect of the GST increase will be worn off. Second, we had the transport effect. Some of the adjustments to our road tax and the various costs of owning cars resulted in low inflation in 2007 and, in 2008, because of the base effects, we will see a blip in the number. Third, of course, is the oil prices. If we look at the oil prices this year, there was a sharp downturn where oil prices dropped to between US$50 and US$60 in the first part of this year but, in the

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second half, it has picked up. So, next year, again based on base effects, we expect to see the CPI being higher. But we expect the base effects to be washed out by the second half of next year.

Dr Lily Neo (Jalan Besar): Two supplementary questions, Sir. May I ask the Minister whether the Singapore dollar should be allowed to appreciate further to mitigate the rising cost of living and how would this affect the export business cost under the local tourism industry? Secondly, should the CPI have a sub-component based on food and public transport - the two major expenditures of the lower income group - to better reflect the impact of inflation on this group?

Mr Lim Hng Kiang: Sir, as I explained in my answer, the MAS has been adopting an exchange rate policy that allows the Singapore dollar to appreciate gradually and modestly since April last year, and therefore it has helped us, because of the strengthening of the Singapore dollar, to reduce imported inflation. Again, in October this year, the MAS, in looking at the exchange rate policy, decided to allow the gradual and modest appreciation of the Singapore dollar at a slightly faster rate. So we are allowing the Singapore dollar to appreciate a bit more and this, of course, means that we have a better buffer against imported inflation. But as Dr Lily Neo has mentioned, the trade-off is, of course, we have to watch our export competitiveness, not just in terms of the tourism industry but, overall, in our exports. So this is the trade-off and the balance that we have to do.

The composition of the CPI is reflected in fairly great detail. In fact, in the basket that we use to compute the CPI, food constitutes 23%, and there is a very detailed breakdown of uncooked food, cooked food, etc. It is a very detailed

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breakdown of what constitutes that 23% of food within the CPI basket.

Similarly, transport is the second biggest item - around 21%-22%. And in that transport component, we break it down further into public transport, private transport and the different impact of the different components. So it is very detailed.

More importantly, I am sure Members will remember that we also measure the CPI affecting different income levels - the bottom 20%, the top 20% and the middle 60%. So we have a better feel of how the CPI affects the different groups of Singaporeans.