17% Inflation Expected to Continue for 1Q06 at Least
Feb 02, 2006
Deyi Tan (Singapore) and Denise Yam, CFA (Hong Kong)
Prices still rising at 17% year on year: The consumer price index rose by 17% YoY in January (vs. 17.1% in December), making this the fourth consecutive month of double-digit inflation following the fuel price hike of 126% in October.
Fuel price spillover on other segments: We are still seeing strong inflationary pressures in segments such as food (+3.6 ppt and 15.2% YoY) and processed food (+2.4 ppt and 13.9% YoY), due to higher transport costs; housing (+3.7 ppt and 13.1% YoY), due to utilities; and transport (+6.2 ppt and 44.1% YoY), due to higher fuel prices. Secondary effects also appear to be seeping into other segments such as clothing, healthcare and education, where January inflation is faster, at 7.7%, 7% and 8.4% YoY respectively. Meanwhile, with only details for broad price categories, we are unable to calculate core inflation for January. However, December core inflation indicates a slight slowdown to 7.9% from 8.1% in November. Inflation to ease in “steps” in 2006: We expect 1Q06 inflation to remain broadly around levels seen in 4Q05 (17-18%) and to ease in “steps” throughout 2006, because inflationary pressures are driven primarily by the transport segment and fuel prices are fixed and raised in “steps”. As the current government embarked on its first fuel price hike in March last year, inflation will likely only ease in late 1Q06 to 14-15%, owing to higher base effects, before hitting single-digit territory in 4Q06 if the government does not raise fuel prices further. The government currently appears divided in its statements regarding fuel subsidies. Our data show that household kerosene is likely the most highly subsidized fuel, at around 65%, and the weighted average fuel subsidy is probably around 20% against fuel prices today. Trade surplus widens further to US$3.3 billion: The net trade surplus widened from US$2.8 billion in November to US$3.3 billion in December, as overseas demand for both oil and non-oil goods surged. Exports rose 22.1% YoY (vs. 11.5% in November), as non-oil exports (three-quarters of total exports) rose 17.8% from 11.5%, along with higher oil exports of 38.8% from 14.6%. Meanwhile, import growth dropped 3.7% YoY, with a 7.9% fall in non-oil imports due primarily to higher bases. For the full year, trade surplus stood at US$28 billion against US$25.1 billion in 2004 with exports rising 19.5% YoY (vs. 17.2% in 2004) and imports rising 23.7% YoY (vs. 42.9% in 2004). We acknowledge the contribution of Malika Pant to this note.
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