Why the moderation in Singapore inflation could be short-lived

Tighter labour market pose a threat.

Singapore inflation slowed to 1.6% in September. Maybank Kim Eng said the biggest drag came from the “Private Road Transport” subcomponent which was affected by continued decline in COE premiums (Sept 2013: -3.9% YoY; Aug 2013: -17.9% YoY) following the high base from a year
earlier.

However, Maybank noted that despite this moderation, upside risks linger.

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Overall, the modest inflation can be attributed to macro-prudential measures and steps to ease cost of living pressures, such as the curbs on property speculation, restrictions in car loans eligibility and household debt, as well as the disbursement of HDB's S&CC rebates.

Nonetheless, despite the moderate CPI inflation, upside risks remain, especially from the tight labour market arising from the higher costs and tighter conditions for the hiring of foreign workers that could translate into higher domestic prices through higher business operating costs.

Consequently, Monetary Authority of Singapore (MAS) maintained its policy of gradual appreciation of the SGD NEER, reflecting its monetary policy focus on inflation risks as growth risk dissipates amid pick up in quarterly real GDP growth as per the advanced estimate for 3Q 2013 i.e. +5.1% YoY vs +4.2% YoY in 2Q 2013 and +0.3% YoY 1Q 2013.