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SINGAPORE'S consumer prices fell for the 19th straight month in May, recording the biggest decline since August 1986. The large drop is mostly due to the timing of conservancy rebates in May 2016, which were not given in the same month last year.
Service and conservancy charges (S&CC) rebates, which affect the housing maintenance and repair cost component were disbursed in April, July and October last year. This year, they were disbursed in May, and will be disbursed in July and October.
The different schedules resulted in the cost of housing maintenance and repairs falling sharply on a year-ago basis; while the decline in actual and imputed rentals was largely stable.
According to the Monetary Authority Singapore (MAS) and the Ministry of Trade and Industry (MTI), the negative contribution from the S&CC rebates in May will be reversed in June.
The 17 economists polled by Bloomberg before the Department of Statistics released the data on Thursday, had forecast headline inflation at -0.8 per cent. The actual reading for May was -1.6 per cent. April's reading was -0.5 per cent.
Core inflation - which excludes the costs of accommodation and private road transport - hit a 14-month high of one per cent compared to 0.8 per cent the previous month.
CIMB Private Banking economist Song Seng Wun said: "The disbursement of conservancy rebates can cause distortions to the consumer price index (CPI), which is a key reason for the large drop." But Mr Song said, core inflation rates still mattered the most as it is consistent with what most people experience day to day, such as food and service prices.
United Overseas Bank (UOB) economist Francis Tan said the large decline in headline inflation will be temporary. "Next month we'll see a smaller contraction due to low base effect . . . last year there wasn't a (S&CC) rebate (in May) and we should not think that this large fall in prices will be lasting."
Mr Tan emphasised that the economy is not in a deflationary cycle because of rising prices in other areas such as food and services. He added that due to the weather phenomenon, La Nina, there could be a shortage in food supply resulting in a global uptake in food prices.
Food inflation edged down to 2.2 per cent from 2.3 per cent in the previous month, as increases in the price of prepared meals (such as restaurant food) moderated.
Meanwhile, services inflation rose to 1.5 per cent from 0.7 per cent in April, as the disinflationary effect from the reduction in foreign domestic worker concessionary levy since May 2015 dissipated.
OCBC Bank's Selena Ling, who is head of treasury research & strategy, does not anticipate that the deflationary pressures will dissipate significantly for headline inflation in the coming months. She noted that COE (certificate of entitlement) premiums are "currently below the 2H15 average", while crude oil prices are "close to the 2H15 average".
Private road transport cost was 7.6 per cent lower, compared to the 7.1 per cent decline a month earlier as prices at petrol pumps fell. Accommodation costs dipped 6 per cent with the doling out of S&CC rebates.
UOB's Mr Tan is more concerned that May's core inflation had hit a 14-month high. He said: "This may add to some pressure for MAS to rethink its current policy stance on zero appreciation of Singapore's nominal effective exchange rate in their next meeting in October." He maintains UOB's forecast for the Singapore currency against the US dollar to remain at S$1.36 by end-2016.
MAS and MTI said that CPI inflation is projected to remain negative throughout 2016, and average minus one to zero per cent for the year as a whole. As for core inflation, it is likely to be in the lower half of the 0.5-1.5 per cent forecast range for the rest of the year, barring a sharp rise in global oil prices.