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WHILE Singapore's headline inflation rate may have dipped further into negative territory in July, the rise in core inflation underscores how underlying cost pressures still remain.
Still, economists say prices could dampen further in the months ahead due to a mix of both external and domestic factors - including lower oil prices, regional currency weakness, and softer accommodation and car prices here.
Unless signs of a technical recession or a softer job market materialise, however, economists do not expect the central bank to ease monetary policy in October.
Overall inflation eased marginally to -0.4 per cent in July from June's -0.3 per cent - marking its ninth straight month in negative territory, and the longest stretch of below-zero headline inflation since June to December 2009.
But economists, including UOB's Francis Tan, remain unfazed by the sustained period of negative inflation. "Weaker prices going forward will be due more to (external) price and currency pressures, and not a severe demand shock here - so it's not deflation," Mr Tan told The Business Times.
According to data released by the Department of Statistics on Monday, July's print - which was lower than the market's expectation of a -0.2 per cent reading - was dragged down by declines in accommodation and private road transport costs.
Accommodation costs declined by 2.8 per cent following the 2.6 per cent drop in the previous month, reflecting the continued softening of the housing rental market.
Private road transport costs fell by 0.1 per cent after rising by 1.2 per cent in June. The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said in joint comments that this was mainly on account of the decline in Certificate of Entitlement (COE) premiums for cars.
But while headline inflation eased more than expected in July, core inflation - which excludes the costs of accommodation and private road transport - surprised in the opposite direction. At 0.4 per cent, July core inflation was slightly higher than June's reading of 0.2 per cent, and private-sector economists' forecast of 0.3 per cent.
MAS and MTI said the rise in core inflation was largely due to the more moderate decline in electricity tariffs and higher services inflation.
Indeed, because of a smaller decrease in electricity tariffs, the prices of oil-related items fell by 8 per cent last month, following the 9.5 per cent decline in June.
Food and services inflation, however, remained in positive territory. Food inflation edged down to 1.9 per cent from 2 per cent a month earlier, owing to smaller price increases for non-cooked food items and hawker food. Services inflation came in slightly higher at 0.6 per cent compared with 0.5 per cent in June, due to a rise in educational course fees and holiday travel costs.
Said CIMB Private Banking economist Song Seng Wun: "The fact that core inflation is up shows that there are still mild underlying cost pressures, which gels with perceptions among people who will say: 'Where got negative inflation?' "
In their joint comments, MAS and MTI again reiterated their full-year inflation forecasts, saying: "For 2015 as a whole, MAS core inflation and (headline) inflation are projected to come in at the lower half of the forecast range of 0.5-1.5 per cent and -0.5-0.5 per cent respectively."
For now, economists continue to expect MAS to keep to its current monetary policy stance of a "modest and gradual appreciation" of the S$NEER (Singapore dollar nominal effective exchange rate) - even as they flag the various risks that could prompt a change.
Mizuho economist Vishnu Varathan cautioned: "Deflationary commodity supply shocks led by oil prices, alongside intensifying downside risks from China - either due to an economic slowdown or financial market shocks - warrant policy consideration.
"Point being, a status-quo MAS October meeting is no longer an unequivocal outcome, if the MAS ascertains that the speed and depth of slide in commodity and financial markets pose a clear and present danger to the real economy."