For a given path of nominal demand, that would tend to reduce the pressure of demand on global commodity prices, as many of the largest EME economies are, basically, commodity importers themselves. But persistent elevated inflation in the EMEs would also increase the nominal price of some of our imports, unless an adjustment in nominal exchange rates were permitted. In fact, over recent months there have been some steps towards taking domestic monetary action across a number of emerging market economies. But there is a risk that higher EME inflation will persist if, left unchecked, it becomes embedded in inflation expectations. With inflation also elevated across the major industrialised economies, this underlines the risk to global inflation from imbalances in global supply and demand. Individual countries can suffer exogenous shocks to inflation from commodity prices, but that is essentially a relative price shift, to which the world economy has to adjust. By contrast, a persistent rise in inflationary pressures cannot be exogenous for all countries collectively. In that respect, the international monetary regime, and the global imbalances it has sustained, continues to pose risks to the outlook for our economy. Indeed, in terms of where we find ourselves, we must take care not to put the cost shock and the credit shock in completely separate boxes. They both owe something to global imbalances.
Third, wage increases of the past three quarters affect current wages with a summed coefficient of less than 0.5, implying that lagged impulses fade within a few quarters. Fourth, the effect of price pressures on wage increases is empirically weak; wages respond less than proportionately to prices during the year. Combined, these estimates suggest that the pass through from costs to domestic prices is subject to relatively contained momentum and feedback effects. But the entire course of the pass-through process is still characterised by a degree of persistence. Accordingly, in the absence of further major global price shocks, domestic inflation should not accelerate further in Q4, but could remain elevated relative to the historical average. A key upside risk factor influencing the ongoing pass-through to consumer prices is the behaviour of cost mark-up by businesses. Profit margins might have been impaired in the earlier period when global costs shocks were intensifying, and businesses might be inclined to restore them at least partially in the period ahead. Monetary policy stance has progressively tightened Singapore’s short-term AS curve is gradually shifting to the right as global costs subside and non-resident worker inflows pick up. Wages in the first half of the year traced out a temporarily steeper portion of the Phillips Curve but are expected to revert to their historical configuration in the period ahead. The external components of the IS curve could moderate in the quarters ahead. These represent pro-equilibrating movements, but we are alert to unexpected developments and fresh shocks.