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Singapore inflation edges down to 1.6% in Sept

Economists say it's a blip, attribute it to a temporary fall in road transport cost

[SINGAPORE] After climbing four consecutive months, inflation in Singapore eased to 1.6 per cent in September from 2 per cent in August - largely due to a decline in the cost of private road transport.

Despite the downside surprise, economists BT spoke to described this as a "blip" and "nothing worth making a big deal about", as domestic cost pressures continue to drive up consumer prices into 2014.

"Yes, inflation was a bit lower in September, but that was entirely due to a high base effect from transport costs," said Barclays economist Joey Chew.

Private road transport costs fell by 2 per cent after rising marginally by 0.1 per cent in August, as a correction in car prices more than offset the increase in petrol pump prices.

But such a phenomenon isn't expected to last for long.

"As it is, COE (certificate of entitlement) premiums are already approaching pre-tightening levels. The base effect will lapse from October onwards, which spells higher transport inflation ahead," said DBS economist Irvin Seah.

Added Ms Chew: "I think we should focus more on Q4 and next year. It's very clear that the trajectory is upwards. (What happened in September) is all water under the bridge. In my view, we shouldn't be rejoicing at low inflation - this is the last below-2 per cent inflation print we'll see in a long time."

Beyond COE premiums, economists say Singapore's tight labour market and other rising cost pressures will continue to push consumer prices higher.

Said UOB economist Francis Tan in a research note: "We reiterate that higher labour costs from the increase in foreign worker levies and the tight labour market environment pose risks to inflation (especially core inflation) in the coming months.

"This will likely impact the costs to the services industry more as they tend to have higher labour input content."

September's headline inflation came in below consensus; 16 economists polled by Bloomberg had expected last month's consumer price index (CPI) to rise 2 per cent.

"Maybe some people saw an increase in services costs in August and extrapolated from there," said Ms Chew, when asked what forecasters could have missed in their higher inflation projection.

Services inflation, however, was stable in September at 2.7 per cent, as the stronger pick-up in the cost of recreation & entertainment and holiday travel was offset by lower contributions from education and household services fees.

Accommodation costs, meanwhile, went up by 3.9 per cent, slightly lower than the 4.2 per cent rise in August. The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said this largely reflected a smaller increase in market rentals for both private and HDB properties.

ANZ economist Daniel Wilson believes inflation will remain below 2 per cent next month, "with the final disbursement of the rebate for Service & Conservancy Charges offsetting rising private transport costs".

MAS core inflation - which excludes costs of accommodation and private road transport - slowed slightly to 1.7 per cent in September, from 1.8 per cent in August.

The government again said that overall imported inflation is expected to remain subdued, given spare production capacity in the advanced economies, and ample supply buffers in the commodity markets.

"However, the pass- through of domestic costs to prices of consumer services could intensify as a result of the rising cost pressures that firms are facing from business rentals, COE premiums for commercial vehicles, and labour costs," said MAS and MTI in their statement.

Taking these factors into account, MAS core inflation is expected to rise "over the next few quarters", and average 1.5-2 per cent in 2013, and 2-3 per cent in 2014.

The government also reiterated that headline inflation is projected to come in at 2.5-3 per cent in 2013, and 2-3 per cent in 2014.