Good Bye 2007, Hello Inflation

The financial highlight for 2007 is definitely the sub-prime crisis in the US. But in Singapore, there are other attention-grabbing headlines like the surging property prices and rising inflation. The CPI for Nov 2007 rose 4.2% when compared to a year ago.

Going forward, the bad news of inflation is getting worse. UOB has increased its inflation forecast for 2008 to between 4.5% and 5%. This comes after a taxi fare hike, which UOB said was more than what it had expected.

Things are not as bad as it seems if wages has kept up with the inflation. But has wages rose in tandem with the inflation? Except for the 21% pay hike that the ministers are getting, the rest of the Singaporeans are set to see tougher times ahead. No wonder Mah Bow Tan said that there is no property bubble in Singapore. His annual pay of almost $2 million is more than enough for a penthouse.

The MAS announced that it will allow a greater rate of appreciation of the Singapore dollar to combat inflation. While this is a move in the right direction, there is a limitation to what that policy can do. For one, it cannot control the interest rates to cool domestic demands.

Since MAS allowed a greater rate of appreciation of the Singapore dollar in the second half of 2007, the 3-month SIBOR has dropped from 5.63% in August to 4.73% in December. Baring a recession, there will be enough liquidity to sustain high asset prices.

On the global front, China is struggling to contain inflation. For the past decade, China has been the low-cost factory for the world, it's entry into the world market has produced an era of high growth with low inflation. As inflation continues to take its toll on China, it is a matter of time that the cheap made-in-China T-shirt becomes not so cheap after all.

In the US, the Fed signalled that it is ready to act aggressively (read rate cate) to prevent the US economy from falling into a recession. If that fails to re-ignite the US economy, stagflation, period of low growth and high inflation, will soon follow.

So what can you do in Singapore to overcome inflation? Enter politics. If you can make it as a minister, you don't have to worry about inflation, ever.