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CPI hits 6-mth low in August but core inflation still firm

MAS not expected to relax monetary policy stance in Oct
Wednesday, September 24, 2014 - 00:00

[SINGAPORE] Consumer price inflation continued to ease more than expected in August, dropping to a six-month low of 0.9 per cent from July's 1.2 per cent.

But economists aren't putting too much weight on the surprisingly benign headline number, since core inflation - which strips out accommodation and private road transport costs - remains stubbornly firm and elevated at 2.1 per cent, and is more likely to affect monetary policy.

Said Mizuho economist Vishnu Varathan: "MAS (Monetary Authority of Singapore) will not be distracted by transient factors dragging headline inflation (down), whereas underlying inflation is "sticky" and could potentially have a more lasting impact on inflation expectations. The main takeaway is that headline inflation capitulating is perhaps a welcome relief amid sub-par growth; but it is inconsequential to policy outcome."

Added JPMorgan Chase Bank's Ben Shatil: "In spite of easing headline price pressures, we continue to think that MAS core inflation is the more important measure from a policy perspective."

Indeed, despite August's disinflation to below one per cent, economists agree that the central bank will stick to its current monetary policy stance at its next review in October - allowing for a gradual appreciation in the trade-weighted Singapore dollar.

August's gentle - some called it "weak" - inflation rate caught the market by surprise. The median forecast of 20 economists polled by Bloomberg before the Department of Statistics released the data on Tuesday was for a 1.1 per cent year-on-year rise in the consumer price index (CPI).

Lower vehicle COE (certificate of entitlement) premiums were the main cause of August's lower inflation; private road transport costs fell 2.9 per cent, following July's decrease of 1.6 per cent.

The soft housing rental market also exerted a drag on inflation. Accommodation costs declined 0.2 per cent - the first fall into negative territory since 2010 - after coming in flat in July.

Noted Barclays economists Leong Wai Ho and Bill Diviney: "Inflation in this category is now in its ninth consecutive month of decline, and comes amid continued weakness in the property market - residential rents having fallen 0.2 per cent quarter-on-quarter in Q2, the third quarterly fall."

MAS and the Ministry of Trade and Industry (MTI) said in joint comments that the easing in August's headline inflation also reflects "a more moderate increase in services fees".

Services inflation edged down to 2.1 per cent in August from 2.5 per cent in July, due to more modest rises in the costs of recreation & entertainment and holiday travel.

Overall food inflation was slightly lower too, at 2.9 per cent compared to 3 per cent the previous month, as the increase in prices of prepared meals eased.

But non-cooked food prices rose at a faster pace of 3.4 per cent compared to 2.8 per cent in July, because of steeper price increases for seafood and vegetables.

With a lower contribution from services costs, core inflation inched down slightly to 2.1 per cent in August, from 2.2 per cent in July.

But CIMB economist Song Seng Wun doesn't expect this to last long: "The services landscape is very competitive, so I suspect companies have been absorbing their higher costs than passing them on to consumers. But the upward pressure on wages will continue, and I don't think they can keep taking it on the chin."

Added DBS's Irvin Seah: "Core inflation has continued to stay above the headline number, and that reflects the broader impact of the escalation in business and labour costs, which are associated with ongoing restructuring efforts."

MAS and MTI reiterated their expectations for headline inflation to remain subdued for the rest of this year, due to the continued drag from imputed rentals and car prices. At the same time, they flagged domestic cost pressures - particularly those stemming from a tight labour market - as the primary source of inflation.

While private-sector analysts expect core inflation in 2014 to come in within the official forecast range of 2-3 per cent, some economists think headline inflation could come in under the government's projection of 1.5-2 per cent.

This is due to expectations of softening housing and car prices, and the fact that headline inflation from January to August this year already stands at 1.5 per cent.

Said Citi economist Kit Wei Zheng: "We expect headline inflation to average 0.8 per cent from September 2014 to May 2015, falling to as low as 0.5 per cent in some months. (We) would not rule out a further cut in MAS's 2014 inflation forecast to 1-1.5 per cent from 1.5-2 per cent currently."

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