Food retail prices set to rise as supplies cost more

Supply price index for food jumped 10% in October over last year
Erica Tay, Straits Times 3 Dec 07;

THE price of a meal out seems set to rise as food supply costs, especially for imports, soared for the second month in a row.

Many eateries have yet to pass on the higher charges to customers, but economists believe they will not be able to hold out much longer, given the severity of the cost hikes.

Official figures released last week showed that Singapore's domestic supply price index (DSPI) rose 4.9 per cent in October from a year ago, and its food component, 10.3 per cent. This followed a 10 per cent jump in September.

While its more famous cousin, the consumer price index (CPI), tracks price rises faced by end-consumers, the lesser-known DSPI tracks the prices of goods made locally or imported that are retained for use in the domestic economy.

This means that while the increase in the price of a bowl of noodles is reflected in the CPI, increases in the prices of the ingredients - such as flour, meat and condiments - are reflected in the DSPI.

The DSPI showed prices of live animals were 24.5 per cent higher in October than a year ago; of eggs and dairy produce, 41.6 per cent; of vegetables and fruit, 5 per cent. Fish prices fell 0.5 per cent.

DBS Bank economist Irvin Seah said the new data signals that faster rises in consumer food prices are probably just around the corner.

Food makes up the largest chunk of the CPI, which is used to calculate the headline inflation rate.

The average Singapore household saw its food bill go up by 4.3 per cent in October from a year ago.

'Consumer food prices usually follow supply prices with a lag, as retailers and food sellers tend to absorb cost hikes for some time,' Mr Seah said.

United Overseas Bank economist Ho Woei Chen expects food inflation to rise, saying: 'Suppliers will eventually have to pass on higher costs.'

She said rising rents, wages and food costs will force those in the catering sector to raise prices for consumers.

Restaurateur Nicholas Pang has seen ingredients rise 20 per cent in price in the past six months.

'Pork and poultry cost 15 per cent more, and cooking oil is up by 30 per cent,' said Mr Pang, who runs three Japanese restaurants and one fast-food outlet.

Still, he has not raised his menu prices. He said: 'It doesn't make sense to up your prices every time costs increase.'

He prefers to sign forward contracts with suppliers to lock in costs, and switch to alternatives when possible.

'But if food costs keep rising, we must at some point review our prices,' he noted.

Increasingly expensive imports - particularly of meat, live animals, dairy produce and eggs - are a major factor behind higher supply prices.

Fuelling the jump in farm produce prices is a global supply crunch caused by bad weather and by a shift in farm use towards growing crops for biofuels as rising crude oil prices make biofuels more viable, explained Ms Ho.

The food portion of the import price index also rose in October, by more than 10 per cent from a year ago.

Higher food inflation is a global issue, said Standard Chartered Bank economist Alvin Liew. He said: 'Agricultural produce prices have soared in countries such as China, from which Singapore imports a great deal.'

He predicted CPI food inflation will average 4 per cent next year.

Mr Seah was more pessimistic: 'We are looking at between 5 and 6 per cent.'

Low-income groups will be hit the hardest by higher food prices as a greater chunk of their income goes to food, he added. Thus, he argued, 'policy action is needed to cushion rising food costs'.