Prices gained 6.4 per cent from August last year, down from a 26-year high of 7.5 per cent in April, May and June this year, according to the Department of Statistics yesterday. The July rate was 6.5 per cent.

The latest number gelled with tips from economists, who had forecast August inflation at between 5.8 per cent and 6.5 per cent.

They say yesterday's figure indicates that inflation has probably peaked and that the Monetary Authority of Singapore (MAS) could loosen monetary policy to let the Singdollar rise at a slower pace.

'We continue to expect the headline year-on-year inflation rates to moderate gradually in the second half and more significantly next year as the impact of the previous Singdollar appreciation and the growth slowdown begins to kick in,' Citigroup economist Kit Wei Zheng said.

'With policymakers already flagging the possibility of a recession, we maintain our view that the MAS will probably shift to a neutral policy stance in October, while a downward band re-centring cannot be ruled out.'

Singapore sets monetary policy by managing the value of its currency via a secret basket of the currencies of its largest trading partners.

The Singdollar can trade freely as long as its trade-weighted value remains within the MAS 'policy band' limits.

Downward band re-centrings - moves to guide a Singdollar depreciation to make local exports more competitive - occurred during the severe Sars epidemic downturn in 2003 and after the dotcom bust in early 2002.

In April, the MAS did a one-off band re-centring to help fight inflation. This worked out to about a 2 per cent appreciation of the trade-weighted Singdollar, United Overseas Bank economist Ho Woei Chen said.

Now with inflationary pressures coming off, economists say the concern is shifting from skyrocketing prices to growth as Singapore looks increasingly likely to fall into a technical recession.

Ms Ho, who expects full-year inflation to average 6.4 per cent and fall to about 2.5 per cent next year, sees a mild technical recession - when an economy has shrunk for two straight quarters - as a real risk.

The Statistics Department report yesterday showed that food prices rose by 8.4 per cent compared with the same period a year ago. Dearer cooked food, rice and other cereals, fresh poultry, milk products, cooking oils, fresh vegetables and fish all added to the inflationary mix.

'With the China milk issue, food prices could head north again,' warned OCBC economist Selena Ling, referring to the tainted-milk scandal that is turning into a supply crunch of sorts as governments ban imports and retailers take China milk products off their shelves.

Housing costs advanced 12.8 per cent last month, a rise attributed to higher accommodation costs and electricity tariffs.

gabrielc@sph.com.sg