Singapore’s inflation to remain benign in October

A rise of just 0.8% in price index is expected.

Financial curbs on car loans and higher COE quota have been the primary reasons behind the corrections in COE premiums, which in turn have brought about the moderation in inflation.

However, DBS says that this is mainly policy driven and the effects will be transient. COE premiums fell by about 20% between April to May this year. Though this lowers the trajectory of the transport CPI index relative to last year, the base effect will dissipate going forward. And with the high weightage on private transport cost within the CPI basket, transport inflation may stay low for now but will rise rapidly thereafter.

Headline inflation has been highly distorted by policy effect. That also explains why the core inflation reading of DBS has been higher than the headline number over the last 4 months and for most part of the past 10 months.Potentially this could mark the first time since 2007 where the core inflation for the year will be higher than the headline inflation. Year-to-date, core inflation has averaged 2.1% versus 1.4% for the headline number.

Yet, there are two factors that may offset the potential increase in transport inflation going forward. Housing CPI inflation has fallen by 0.1% YoY in the previous month. While the dip is marginal, this is the first time since Mar10 that housing inflation recorded a negative figure.

Here’s more from DBS:

Essentially, rental has been sliding as the property market continues to cool under the weight of the macro-prudential measures introduced by the government in recent years. If rental continues to moderate, expect housing CPI inflation to weigh down on the headline number in the coming months.

Moreover, global energy prices have been falling. Crude oil prices have dipped to multi-year low and this has sparked a global disinflationary effect. As a net oil importer, the decline in energy prices will help in suppressing overall domestic inflationary pressure. 

Nonetheless, there are still existing cost pressures within the domestic economy. Strip out housing and private transport inflation and core inflation is expected to remain above the headline CPI inflation number. Upward price pressure continued to be felt in items such as food, clothing, education and healthcare services. In our opinion, this reflects a broader impact of the escalation in business and labour costs from the on-going restructuring.