Tight labour market poses inflation risk

October 29, 20149:40 am336 views
Tight labour market poses inflation risk
Tight labour market poses inflation risk

SINGAPORE — The labour market is expected to remain tight in the coming quarters, sustaining wage pressures and leaving firms to continue grappling with higher manpower costs that may be passed on to consumers, the Monetary Authority of Singapore (MAS) said yesterday.

Such upward consumer price adjustments will be more evident in certain domestic-oriented industries, such as healthcare, but the effect will be less marked in other sectors as businesses have to keep prices affordable to remain competitive.

“The labour market should remain tight, given strong manpower needs in the non-tradable sectors amid restrictions on foreign labour inflows. Economy-wide wage growth will likely be around the historical average, but wage pressures will be stronger in certain industries,” the central bank said in its macroeconomic review report released yesterday.

Echoing the central bank’s view, UOB economist Francis Tan expects the pass-through effect of higher wages on consumer prices to be uneven across the different industries.

Resident wage growth remained firm at 3 per cent in the first half of this year, although this was slower than the 4.3 per cent recorded last year. This is amid a low overall unemployment rate of 2 per cent on a seasonally adjusted basis, reflecting strong labour demand.

“Labour costs and rents have been the two largest cost factors that businesses have to cope with, but how much of these costs are being passed through to consumers very much depends on the industry structure and also competition within the industry. For example, externally-oriented businesses may not pass on so much because they’re competing on the world level,” Mr Tan said.

CIMB economist Song Seng Wun said the pass-through of higher manpower costs to consumers could place upward pressure on inflation, but government subsidies such as the Pioneer Generation Package as well as falling global oil prices could provide some relief.

“Inflation coming from energy, commodities has been much milder than expected. Government policies such as giving subsidies and rebates to healthcare are taking some pressure off headline inflation, but the pressure from restructuring remains intact — basically the consequences of that are on wages and rentals. This is likely to persist over the coming year,” he said.

The MAS said core inflation — which strips out accommodation and transport costs — could rise slightly into early 2015 but ease to about 2 per cent by the end of that year, subject to movement in oil prices over the next few months. Core inflation was 2.1 per cent in the third quarter of this year, a notch down from 2.2 per cent in the second quarter.


news source & image credit: todayonline.com

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