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Negative inflation persists, but core inflation inches up

It's unclear what this could mean for the shape of April's monetary policy, pending the Budget statement due today

Consumer prices may have fallen for the 16th straight month in Singapore, but that doesn't mean prices are subdued across the board.


Consumer prices may have fallen for the 16th straight month in Singapore, but that doesn't mean prices are subdued across the board. 

While February's softer-than-expected -0.8 per cent headline inflation rate came from cheaper cars and a softer housing rental market, almost all other categories registered a year-on-year increase in prices.

Indeed, core inflation - which strips out the costs of private road transport and accommodation - actually edged up to 0.5 per cent in February, from January's 0.4 per cent. This was higher than the market's expectation for a 0.3 per cent reading, and marked the third consecutive month of increase.

Market voices on:

What this could mean for April's monetary policy statement, however, remains unclear. Some economists expect the Singapore dollar policy to remain as is, though others flag the rising risk of an easing stroke. But most of them are waiting to see what Finance Minister Heng Swee Keat announces in his Budget 2016 speech this afternoon.

ANZ economist Ng Weiwen said: "The Monetary Authority of Singapore (MAS) will take its cue from the upcoming Budget announcement tomorrow. We expect the government to lean on fiscal levers, rather than the exchange rate, and provide targeted stimulus to the economy."

Citi economist Kit Wei Zheng added: "We await the Budget to finalise our MAS call, and would keep an eye on the fiscal impulse, cost reduction measures for businesses and transfers or rebates for households."

Singapore's headline inflation rate has been in negative territory since November 2014. DBS economist Irvin Seah likened the current situation to 1977's 16 consecutive months of sub-zero inflation. "Plainly, it is on its way to set the longest streak of slump in history," he said.

The 17 economists polled by Bloomberg before the Department of Statistics released the data on Wednesday had forecast headline inflation at -0.7 per cent - slightly above the actual reading of -0.8 per cent.

Amid weaker Certificate of Entitlement (COE) premiums, private road transport costs fell 3.9 per cent, compared to the 1.8 per cent drop in January.

And as the housing rental market continued to soften, accommodation costs dropped 3.2 per cent - extending the 3.1 per cent decline in the previous month.

Mr Seah said he does not expect this trend to bate any time soon. "With housing supply peaking this year and the pain of higher interest rates gradually seeping in, downward pressure on rentals will remain - regardless of whether there is any unwinding in government macroprudential measures," he said.

But beyond these drags on the headline inflation number, core inflation continued rising in February - as it did in January and December. This mostly came from food inflation, the second-largest component (behind housing & utilities) on the consumer price index.

Food inflation rose 2 per cent in February from 1.7 per cent the month before, because of a larger increase in the prices of prepared meals including restaurant, hawker and fast food.

UOB economist Francis Tan said the rise in food prices could have been temporary, since February coincided with the Chinese New Year period and its related price increases.

Overall services inflation was 0.5 per cent last month - unchanged from January. The MAS and the Ministry of Trade and Industry (MTI) said in joint comments: "While domestic services cost saw a stronger pickup, this was offset by a more moderate increase in holiday expenses."

The MAS and MTI reiterated their 2016 inflation forecasts at -1 per cent to flat for overall inflation, and 0.5 per cent to 1.5 per cent for core inflation.

The headline inflation projection was revised downwards last month from an earlier range of -0.5 to 0.5 per cent.

The core inflation forecast, however, was untouched; the MAS and MTI continue to expect a gradual pick-up in core inflation over the course of this year.