Dec 12, 2009

Surge in asset prices to fuel inflation: HSBC

Rate could hit 4% next half-year as spending and home prices climb

By Fiona Chan

INFLATION could hit a high of 4 per cent in the next six months on account of the surge in asset prices here, according to a new report by HSBC.

It said investors feeling rich from the stock market rally are likely to spend more, raising demand - and prices - for goods and services.

At the same time, a continued increase in property prices will also lead directly to a rise in inflation.

This will help boost the consumer price index - the key indicator of inflation here - next year, said HSBC economist Robert Prior-Wandesforde.

He has raised his inflation forecast for next year to 2.9 per cent from 2.5 per cent previously, with inflation expected to peak at about 4 per cent probably in the second quarter of next year.

Investors who have made money from shares will naturally spend more, helping fuel inflation, but even people who do not buy shares will feel the 'confidence effects', said Mr Prior-Wandesforde.

'It is easy to believe that hearing about rapidly rising stock markets will lead people to believe that things are getting better, and vice versa if stock prices are falling.'

He said the Straits Times Index is on course to rise by 6 per cent in the fourth quarter from the third. This suggests that consumer spending will rise by more than 2 per cent in the same period, he said, just in time for a nice Christmas boost for retailers.

HSBC also expects the property market to continue to strengthen. Interest rates are still low, banks are still prepared to lend and households are not saddled with a lot of debt, which means borrowing to buy a home should be relatively cheap and easy.

Also, the huge number of property deals between March and September this year augurs well for prices, said Mr Prior- Wandesforde. According to his data, a jump in transactions often leads to a surge in housing prices.

The price gap between HDB flats and private homes is also close to the narrowest it has been since the 1990s, before which data is not available.

A narrow price gap usually means that more HDB dwellers will upgrade to private housing, Mr Prior-Wandesforde said.

He believes concerns of an oversupply are overblown. The 34,100 figure of unsold units in the third quarter of this year is much lower than the 43,400 in the fourth quarter of last year, and not far from the all-time low of 30,300 in 2007, he said.

All this means that Mr Prior-Wandesforde expects private home prices to rise an average of 2 per cent to 3 per cent for each quarter next year.

This will undoubtedly feed into higher inflation, although private home prices do not have as big an impact on inflation as HDB prices do.

According to HSBC's model, a 1 per cent rise in private home prices leads to a 0.03 per cent rise in consumer price inflation. But the same increase in HDB flat prices adds 0.13 per cent to inflation.

Indeed, the recent revision in annual values for HDB properties has already caused a spike in next year's official inflation forecast. The Government is now predicting that inflation will come in at 2.5 per cent to 3.5 per cent next year, from its previous tip of 1 per cent to 2 per cent.

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