The core inflation, which excludes private road transport and accommodation costs and is monitored by the Monetary Authority of Singapore (MAS), is expected to rise to around 2.5 percent in the second half of this year amid a stronger pass-through of business cost increases, the city-state's central bank, MAS, said in its twice-yearly Macroeconomic Review on Tuesday.
"Given sustained labor demand in the domestic-oriented sectors and more binding constraints in hiring foreign workers, resident wage growth should remain firm this year," the MAS said in the report.
It expected a modest productivity growth this year, and the unit labor cost (ULC) is expected to rise by another 3 percent. " Businesses, in turn, are likely to pass on some of the accumulated increase in ULC to consumers amid generally supportive economic conditions," it added.
The core CPI inflation came in at 2.0 percent in last quarter and first quarter this year, up from 1.6 percent in the first three quarter last year. The central bank, thus, forecasted that the core inflation for the whole year will be at 2-3 percent, up from 1.7 percent last year.
Helped by weakness in price rise of car permits and accommodation costs, the headline inflation will be more moderate, from 2-3 percent previously to 1.5-2.5 percent for the whole year of 2014.
Singapore has been tightening its foreign labor policies to encourage local enterprises to raise their productivity in a bid to drive economic upgrading. The city state has been known for its success in continuous economic restructuring to capture opportunities and move from labor manufacturing all the way to knowledge economy over the past decades.
The MAS also maintain its policy of a modest and gradual appreciation of the Singapore dollar ever since April 2012, in order to contain domestic and imported sources of inflation, and ensuring medium-term price stability as a basis for sustainable growth.
The central said "the cyclical recovery in the Singapore economy is expected to continue, supported by strengthening corporate demand from the G3 economies and steady expansions in the domestic-oriented industries."
But higher labor costs and tighter profit margins could continue to weigh on growth this year. The MAS expected the economy to grow by 2-4 percent this year.