Inflation Thoughts 20110402

2 issues: Strength of SGD and food inflation

First off, CNA has reported that SM Goh, who is also chairman of MAS, has expressed the view that while a stronger SGD will help to mitigate inflation, he is also wary about allowing it to appreciate by too much. This is the conundrum that the MAS has to face given the reckless money printing of global central banks.

On the one hand, the SGD exchange rate is a convenient tool for managing inflation, given that we are so dependent on imports. On the other hand, too high an exchange rate relative to our Asian neighbours would mean that Singapore exporters become less competitive. Furthermore, given our dependence on tourists from the region, it would also make Singapore a more expensive destination.

To a certain extent, our exchange rate policy is not totally free from the monetary policies of other Asian countries such as China, Japan and South Korea, given the need to maintain competitiveness. As such, my view is that unless China decides to stop clowning around with price controls and get serious about fighting its inflation problem through both credit tightening and the appreciation of the RMB, there is a limit to how far the SGD can be allowed to strengthen without hurting the economy.

Given the limits of the extent to which the SGD exchange rate can be used as an inflation-fighting tool, the government will need to implement policies that deal with some of the high-cost structures within the local economy, especially with respect to land and rental prices.

Food Inflation

Given how much the price of corn has risen recently, an agricultural investment analyst has noted that the price of meat will have to increase by around 50% in USD terms over the next few years for farmers to maintain their profit margins. Corn is a major animal feed in the production of beef and pork, amongst other things. Becoming a vegetarian looks increasingly attractive from a cost perspective.

As for wheat, this year's crop could be adversely affected by the worst drought in Texas in over 40 years. With the availability of wheat exports from Russia still uncertain and increasing imports by China, wheat prices could also continue to firm up.

More directly for Singaporeans, Thailand has raised the possibility of limiting its exports in order to keep prices low at home, as part of their security policy of keeping the poor people from rioting like those in Africa and the Middle East. This may mean higher rice prices in the coming months. Time to increase one's long-term storage of rice perhaps?

Short of a reversal in the money printing policy or the advent of Round 2 of the 2008 global financial crisis (which I believe is inevitable, only a matter of timing), we can expect more inflation ahead, regardless of what the government tries to do.