SINGAPORE's headline inflation eased to 0.1 per cent in October from 0.6 per cent in September - its lowest since December 2009 - but that only tells one side of the story. At 1.7 per cent, core inflation (although less than September's 1.9 per cent) continues to diverge from headline inflation, as restructuring costs maintain a grip. (see infographic)
Explaining the drop in headline inflation, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said in joint comments on Monday that this was "mainly on account of base effects associated with fluctuations in car Certificate of Entitlement (COE) premiums, as well as sharper declines in the costs of accommodation and oil-related items".
October's headline inflation of 0.1 per cent was lower than private-sector economists had expected. The median forecast of 13 economists polled by Bloomberg was for a 0.6 per cent year-on-year rise in the consumer price index (CPI).
Economists told The Business Times that car and housing costs dropped more than they had anticipated. Private road transport costs fell a steeper 5.6 per cent last month compared to September's 2.8 per cent decrease, due to a high base a year ago. Accommodation costs declined by 1 per cent as a result of the soft housing rental market, extending the 0.6 per cent correction in the previous month.
Stripping away accommodation and private road transport costs, core inflation - the focus for monetary policy - edged down to 1.7 per cent in October from September's 1.9 per cent. MAS and MTI said this was due to a steeper decline in electricity tariffs as well as lower food inflation.
Given the recent weakness in global oil prices, prices of oil-related items (including electricity tariffs and petrol pump prices) fell by 2.1 last month, after edging down by 0.6 per cent in September. Food inflation eased to 2.8 per cent, while services inflation came in unchanged at 1.7 per cent.
Apart from weaker oil prices, economists also pointed to Pioneer Generation Package subsidies and Service & Conservancy Charges (S&CC) accommodation rebates as additional factors that contributed to the softer-than-expected inflation numbers.
Economists from ANZ and Barclays agree that the divergence between core and headline inflation will continue into 2015. And while economists from Citi, Credit Suisse, and UOB flagged the possibility of headline inflation falling into negative territory over the next few months, they doubt that this will stoke significant deflation concerns.
Said UOB's Francis Tan: "I don't think we should be worried about deflation because unemployment is low and economic growth is still okay. It's not like the situation we're seeing in the eurozone, where deflationary worries are mixed with a decline in aggregate demand and a high unemployment rate."
Added Credit Suisse's Michael Wan: "The sources of disinflation (in Singapore) have been relatively benign thus far. For instance, lower oil prices are unlikely to be viewed by the central bank as a negative, given its potential as a supply-side boost to consumer and global demand. In addition, healthcare subsidies doled out to the elderly through the Pioneer Generation Package are likely (to be) seen as transient.
"The decline in property prices and COE premiums have also been orderly thus far, and seem to be what the government wants to engineer ... From a policy forecasting perspective, we continue to see high hurdles for an easing of exchange rate policy, with the tight labour market still the chief binding constraint. We doubt that the MAS will ease come its next meeting in April 2015, unless the weakness in inflation is driven by a broader collapse in global demand conditions."
Said Bank of America Merrill Lynch economist Chua Hak Bin: "It's not our base case, but if core inflation continues to slide towards 1.5 per cent or lower in the next few months, then MAS may perhaps re-centre at the April 2015 meeting."
Reiterating their inflation forecasts for this year and next year (headline at 1-1.5 per cent and core at 2-2.5 per cent in 2014, and headline at 0.5-1.5 per cent and core at 2-3 per cent in 2015), MAS and MTI said that with the economy at full employment, wage pressures will continue to persist and filter through to the prices of various services items.
Citi economist Kit Wei Zheng also picked up on subtle changes in MAS and MTI's latest joint comments, saying: "Unlike in September, MAS and MTI no longer expect core (inflation) to rise into early 2015, simply stating that core will remain 'firm'. The latest shift in nuance may reflect greater acknowledgement of downside risks to the existing official inflation forecasts. We think headline inflation may turn negative in November and stay below 1 per cent in 2015, while core may stay below 2 per cent in H1 2015, possibly falling below 1.5 per cent in H2 2015."