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Feb inflation sinks to 4-year low, but expected to rise again

MAS still unlikely to ease monetary policy, say economists

[SINGAPORE] Singapore's inflation rate eased more than expected to a four-year low of 0.4 per cent in February, but economists were careful not to make too much of the fall.

They say pent-up wage pressures, rising food prices and a weakening Singapore dollar may drive inflation back up above 2 per cent in the next few months, leaving the central bank with little reason to ease monetary policy at its upcoming April meeting.

The consumer price index (CPI) rose just 0.4 per cent year-on-year in February - smaller than January's inflation of 1.4 per cent and the 0.9 per cent median inflation forecast of Bloomberg's poll of 18 economists.

But much of this was due to an unusually high base of comparison in February 2013, and had been anticipated by the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) in their commentary on January's CPI.

Mizuho economist Vishnu Varathan said: "The softer inflation slip is as transient as it is hollow."

The 7.1 per cent drop in private road transport costs, a main contributor to last month's low inflation, was due to the surge in COE premiums in January last year that was captured in February 2013's CPI, alongside lower petrol pump prices.

Such a base effect will not last over the next few months, as January 2013 was the peak for COE premiums, which tumbled after car loan curbs were implemented in February last year, several economists said.

Citi economists Kit Wei Zheng and Brian Tan said in a note that "as if intending to discourage overly aggressive disinflationary expectations" from forming based on February's near-zero inflation, MAS and MTI stated yesterday that headline inflation is "expected to rise over the next few months due to base effects associated with COE premiums".

In February, core inflation, which excludes accommodation and private transport costs, was also tempered by high-base effects on food and services inflation. Core inflation eased to 1.6 per cent from 2.2 per cent in January.

This came as food inflation slowed to 2.3 per cent from 3 per cent in January. Non-cooked food prices fell after the Chinese New Year and from last year's high base; prices of non-cooked items had spiked during Chinese New Year, which was in February last year.

Services inflation too, slowed to 2.1 per cent in February from January's 2.9 per cent on base effects. MAS and MTI noted that household services costs had been high in February last year due to the new rule on a mandatory weekly rest day for foreign domestic workers.

But both food and services inflation could rise in coming months.

Mr Varathan said: "Higher food inflation may be lurking around the corner, given that the confluence of adverse weather and geopolitics has already triggered a surge in key crop prices." Even with the Thai rice glut, higher crop prices could feed into food inflation in three to six months, he added.

This would be more of a risk if the Singapore dollar continues to weaken against the US dollar, said ANZ economist Ng Weiwen.

However, MAS and MTI expect imported inflation to remain "generally subdued" as a result of spare production capacity and ample supply buffers in the commodity markets. They expect inflation in the months ahead to be driven more strongly by firms raising prices of consumer services more significantly, passing on their rising wage costs to customers.

This is especially since another round of foreign worker levy hikes will take effect in July 2014, said UOB economist Francis Tan. Companies most likely to pass costs on include those in the healthcare, cooked food, education and recreation sectors, he said, pointing out that healthcare inflation hit 4 per cent in February - the fastest pace of cost increases among the categories in the CPI basket.

One factor that might temper an inflation rebound is the slower pace of increase in imputed rentals on owner-occupied accommodation expected, as more housing supply joins the market. OCBC economist Selena Ling said for the first time since November 2009, CPI excluding accommodation dipped 0.1 per cent year-on-year in February.

But wage pressures are expected to dominate and send headline inflation rebounding to as high as 3 per cent by April, going by Credit Suisse economist Michael Wan's estimates.

Economists agree that the central bank is unlikely to depart from its current tight monetary stance when its next policy statement comes out next month. They expect MAS to stick to its current policy of allowing a modest and gradual appreciation in the Singapore dollar nominal effective exchange rate.

"In addition, prospects for GDP growth look quite good this year, with Europe climbing out of recessionary mire, coupled with the US generally looking more buoyant," said Mr Wan.

The government continues to expect both headline and core inflation to be in the range of 2 to 3 per cent for the full year.