Economists say inflation - which can wreak economic havoc if allowed to get out of hand - has probably now peaked for this year.

Singapore's June inflation rate was equal to 26-year highs in April and May, but it was below expectations that it would hit 8 per cent.

The relatively benign figure sent the Singdollar down the most in six weeks to as low as $1.364 to the US dollar. It was seen to ease pressure on the central bank to seek faster currency appreciation to offset dearer imports.

But economists warn that even as inflation moderates from this month on, this is largely due to a technical effect and rising costs remain a key threat to the economy.

Several added that full- year inflation may exceed the official forecast of 5 to 6 per cent. First-half average inflation stands at 7.1 per cent.

They said monetary policy is set to stay tight at the next review due in October.

'Although inflation has now peaked, barring a renewed spike in commodity prices, the Government's projection for 2008 remains under considerable threat,' said HSBC economist Robert Prior-Wandesforde. He reckons inflation will average 6.5 per cent this year.

Standard Chartered Bank's Alvin Liew said the Government is likely to lift its forecast to 5.5 to 6.5 per cent.

Rising food and fuel costs, which are hurting economies across Asia, were expected to drive consumer prices in June to their biggest jump this year. A Bloomberg News poll of 18 economists found they expected an 8 per cent rise.

The analysts were thrown off by a surprise dip in transport cost inflation, which slipped to 5.1 per cent from 6 per cent in May, the Department of Statistics (DOS) figures showed. While petrol rose, higher pump prices put off car buyers, resulting in lower certificate of entitlement prices, the analysts said.

Otherwise, there was little relief as grocery shoppers, diners, commuters and electricity users suffered price hikes that are now all too familiar.

Food prices were up 9.2 per cent, driven in part by the slashing of fuel subsidies across the Causeway. Citigroup economist Kit Wei Zheng said the hike in transport costs there caused a 10 per cent to 30 per cent hike in food import prices here.

Cooking oils, rice, meat and dairy products registered the biggest jumps but price pressure on fruits and vegetables came off a little.

The DOS said leafy vegetables, apples and oranges were cheaper last month than in May. Giving an unusual level of detail, it singled out Taiwanese peh chye, small mustard and spring onions whose prices fell up to 12 per cent.

Housing costs, up 13.4 per cent, continued to weigh heavily on households. Technical effects from January's one-off revision of HDB flat annual values aside, electricity tariffs surged as oil prices set new records. This more than offset services and conservancy rebates handed out.

Inflation is expected to moderate from this month onwards as the comparative effects of last July's Goods and Services Tax hike wear out.

But economists are concerned that tight labour and commercial property markets may lead to second-round inflation effects. CIMB-GK's Mr Song Seng Wun said wages, rentals and transport costs will burden firms and could remain high up to the end of the year: 'Overall inflation has not yet reached a zenith.'

bryanlee@sph.com.sg