Low January inflation masks underlying price pressures

[SINGAPORE] Inflation may have dropped to a near four-year low in January - dipping to 1.4 per cent from 1.5 per cent in December - but economists say the benign headline rate masks underlying price pressures.

With core inflation remaining on an upward trend and base effects set to wear off beyond Q1, economists that The Business Times spoke to do not expect the easing of prices to last for long.

The easing in overall inflation was mainly due to a larger decline in private road transport costs, which fell 3.5 per cent in January after a 2.8 per cent decline in December. This was in turn due to lower COE premiums at the end of 2013.

A more moderate increase in accommodation costs, too, helped make overall inflation slightly lower than most were expecting. Accommodation costs rose 2.4 per cent last month from 2.9 per cent the previous month, as imputed rentals on owner-occupied accommodation edged up at a slower pace.

The 15 private sector economists polled by Bloomberg had been expecting a 1.5 per cent increase in the consumer price index (CPI).

ANZ and Mizuho Bank economists pointed out that the decline in private road transport costs shaved half a percentage point off headline inflation in January, skewing the overall number downwards.

Highlighting the base effects at play, Mizuho's Vishnu Varathan said: "At just under $80,000, COE prices this January looked like a walk in the park compared to the $90,000 (seen this time last year). So it gives a very distorted picture . . . Whatever reprieve has come through in January is fleeting. Enjoy the base effects while they last because in any case, it's something artificial."

Indeed, core inflation crept up in January, even as headline inflation subsided. This, according to OCBC economist Selena Ling, "reinforces (the view) that headline inflationary pressures will take a backseat to core inflation".

Core inflation - which strips out the costs of accommodation and private road transport - rose at a faster 2.2 per cent from 2 per cent in December, due to higher contributions from services and food prices.

Services inflation edged up to 2.9 per cent in January from 2.8 per cent in the preceding month, led by a stronger increase in holiday travel cost and pre-school fees.

Food inflation crept up to 3 per cent from 2.7 per cent in December, reflecting the seasonal uptick in food prices during Chinese New Year.

"As Chinese New Year fell in January 2014 but February last year, the seasonal pick-up in food prices in January 2014 was compounded by the low base last year," said the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) in a joint statement yesterday.

Said ANZ's Daniel Wilson: "Other components of core inflation remain on an upward trend with education, healthcare, and recreation & others all contributing positively. Looking ahead, the increase in excise duties (25 per cent) to be paid on alcohol is likely to cause a shift higher in core inflation as this is passed on to consumers at restaurants and stores."

UOB economist Alvin Liew added: "We continue to see inflation risks higher in 2014 and they will likely come from segments where the labour input content is relatively higher in production. With the tight labour market, employers have to out-bid each other in order to attract workers, and this will result in wage increases (in addition to the impending rise in employers' CPF contribution) and would likely be passed on to consumer prices."

Both Mr Varathan and Barclays's Leong Wai Ho agree that inflation is likely to tick up past Q1, as base effects wear off.

Noting that they do not expect to see changes to monetary policy in April, Citi economists Kit Wei Zheng and Brian Tan said in a research note: "Should Budget 2014's targeted yet multi-dimensional approach to raising productivity growth succeed, this too could alleviate cost pressures in the longer term."