Keep a wary eye on inflation

SINGAPORE's latest inflation figures - a markedly lower- than-expected headline rate of 1.6 per cent in September - would seem to assuage concerns about rising price pressures amid a soft growth outlook. But more likely than not, the dip last month will turn out to be a blip in an uptrend.

High and rising costs of healthcare, housing and (in particular) transport continued to drive the consumer price index (CPI) this year, raising it 2.8 per cent in the first six months. Domestic cost issues in a labour-tight economy, coupled with a bigger concern over imported inflationary pressures, in fact kept the Monetary Authority of Singapore's (MAS) hand in at its recent October monetary policy review, with the Singapore dollar maintained on an appreciating path with no change in the slope, width and centre of the policy band. And arguably, despite the encouraging September CPI report - the market had expected the inflation rate to be maintained at August's 2 per cent - the risks of rising price pressures haven't dissipated. Indeed, if anything, the signs point to a pick-up in the inflation measures in the months ahead.

What stands out in September's CPI numbers is the decline in transport costs - specifically, private road transport costs fell 2 per cent in the month, driven no doubt by fluctuations in vehicle certificate of entitlement (COE) premiums. Financing restrictions on motor vehicle loans introduced in February led to corrections in COE premiums in the ensuing months. But subsequent policy decisions since - particularly plans to regroup cars in the COE categories, taking into account engine power output as well - have resulted in swings in the vehicle premiums, mostly upwards, as buyers seek to pre-empt the changes. In fact, compared to August, car prices were actually higher in September. In any case, underlying the CPI transport figures over the past 12 months or so has been a high base effect that will soon run out, in fact from October.