SINGAPORE'S headline inflation in May remained in negative territory for the seventh straight month, just as the market had expected.
But with core inflation sinking to a new five-year low of 0.1 per cent, the question to be asked is whether the persistent weakness in core inflation reflects not only policy measures, but a deterioration in real demand as well.
And how the question is answered could hold implications for Singapore's growth and monetary policy.
Overall inflation inched up slightly to -0.4 per cent in May, from -0.5 per cent in April, due to the higher cost of private road transport. With higher Certificate of Entitlement (COE) premiums and petrol pump prices undergoing a smaller correction than a year ago, private road transport costs rose by one per cent, after having fallen by 2.1 per cent in April.
The -0.4 per cent headline figure was the same as the median forecast of 17 economists polled by Bloomberg before the Department of Statistics released the data on Tuesday.
Reflecting the soft housing rental market, accommodation costs fell by 2.5 per cent in May, similar to the previous month.
Core inflation, which strips out the costs of private road transport and accommodation, dropped to its lowest reading since January 2010. In joint comments, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said that this "mainly reflected the impact of budgetary measures on services costs, as well as softer food inflation".
Indeed, both services and food inflation eased; services inflation moderated to 0.5 per cent from 1.1 per cent in April, and food inflation, to 1.8 per cent from 2.1 per cent.
MAS and MTI said that the easing in services inflation was largely due to the reduction in the concessionary foreign domestic worker levy and the waiver of national examination fees - measures announced in this year's budget - as well as a smaller increase in telecommunication services fees.
With the government's suite of measures to alleviate consumer price pressures (including medical subsidies and one-year road tax rebates), MAS and MTI flagged that core inflation could "remain subdued at around the current rate in the next few months".
This means that, going forward, core inflation could again fall out of the government's forecast range of 0.5 to 1.5 per cent, as it did in April and May. Economists from DBS, Credit Suisse and StanChart flagged the growing risk that full-year core inflation could undershoot the government's projection, necessitating another downgrade in the official forecast.
Still, several economists - including those from ANZ, Barclays and UOB - believe that May's lower-than-expected core inflation is just a reflection of government policy measures.
Barclays's Leong Wai Ho said: "Despite the downside surprise in core inflation, it continues to be attributable mostly to administrative measures (mostly health) or the supply side (for example, lower oil prices and lower food prices due to higher supply), which is offsetting the continued rise in labour costs for the time being."
UOB economist Francis Tan added: "This is different from the drivers of deflation in the past, where falling prices were due to a contraction in aggregate demand and (when) unemployment rate spiked."
Other economists were less sanguine: they said that the decline in core inflation reflected weaker demand and growth and merited close attention, because a change in monetary policy stance could later be required.
Said DBS economist Irvin Seah: "I'm not denying that (the fall in core inflation) is partly due to supply-side factors, but there are demand-side factors that should be highlighted as well. This is essentially the result of decelerating growth momentum, so I think domestic demand is weakening. And that, to some extent, has resulted in a decline in inflationary pressure."
Noting that demand-side factors "are already slackening", Mr Seah pointed out that Singapore's output gap - the difference between the economy's actual output and its potential output - is turning more negative as growth wanes. Apart from headline gross domestic product (GDP), he cited other high-frequency data, such as muted retail sales and dips in consumer and business loans growth, as evidence of softening economic activity.
Credit Suisse economist Michael Wan said that the impact of lower foreign domestic worker levies and national exam fee waivers on core inflation would probably be small, since when combined, they take up less than 10 per cent of the consumer price index or CPI basket; this suggests that more than supply-side and administrative factors are at play, he said.
And while the lower rate of core inflation may come as a welcome reprieve, StanChart economist Jeff Ng said that it "does show the sluggish nature of the whole Singapore economy as well".
Despite the varying views on the drivers behind lower core inflation, economists generally agree that MAS is likely to maintain its weak appreciation policy in October.
But they warned that any significant darkening in the growth outlook could change the status quo. Said Citi's Kit Wei Zheng: "While MAS and MTI's expectation that inflation will pick up only 'towards the end of the year and into 2016' seems to downplay the low inflation prints in Q3, any material downside surprise in Q2 job creation versus MAS's expectation of a pick-up may raise the risk of an MAS easing in October, or at least re-ignite market expectations of such a move."