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Quick takes: Singapore inflation falls to the lowest in almost 30 years

SINGAPORE'S consumer price index (CPI) fell 1.6 per cent in May compared to a year ago, after a 0.5 per cent slide in April.

The median in a Reuters survey was for a decline of 0.8 per cent in May.

Here are some economists' comments:

DBS senior economist Irvin Seah:

"Inflation surprised on the downside. The headline CPI inflation registered -1.6 per cent year-on-year ( YoY) in May. This is significantly lower than market expectations of -0.8 per cent and also marks the lowest inflation reading in almost 30 years. . . Housing and utilities as well as transport remained the key factors behind the decline. The former was down by 6.4 per cent while the latter fell by 5.7 per cent versus the same period last year.

"Low oil prices are certainly one of the main reasons for the negative inflation. But the slowdown in growth momentum and the impact of earlier macro-prudential measures on housing and car purchases continue to weigh down the headline number. The excess supply in housing stock and its associated downward pressure on rentals indicate that the housing CPI index may continue to fall.

"The easing in car loan regulations recently has brought about increase in car purchases and consequently, upward adjustments in COE premiums. That in turn, is expected to lift the private transport CPI index, given the strong influence of COE premiums on the index. Note that private transport CPI accounts for 11.5 per cent of the overall CPI basket. That's a significant portion but its impact will most likely be felt from June onwards.

"The latest CPI inflation reading is a sharp downward spike, which will lower the trajectory of the inflation significantly. We had earlier projected inflation to revert to positive territory by the third quarter but with this latest number, these expectations will have to be pushed back to the tail-end of the year or to early 2017. Plainly, there is downside risk to our full year inflation forecast of -0.2 per cent.

"Separately, the latest inflation number has reaffirmed a point we made earlier. That is, every economic downturn over the past decades has been juxtaposed with a similar trough in inflation. . . So, the downside risk on inflation may well be a mirror image of the risk to growth."

OCBC Bank's head of treasury research & strategy, Selena Ling:

"This is the biggest on-year decline in the headline CPI since August 1986 (-2.5 per cent YoY) and the sharpest on-month contraction since April 2013 (-1.5 per cent mom nsa). Note there were timing effects of the disbursement of S&CC rebates which had contributed to a sharp drop in the cost of housing maintenance and repairs, even though actual and imputed rentals were largely stable. The other segments that saw disinflationary pressures in May were clothing & footwear (-0.3 per cent YoY) and communication (-0.1 per cent YoY).

"We do not anticipate that the disinflationary pressures will dissipate significantly for the headline inflation prints in the coming months. While COE premiums appear to have bottomed around February and had climbed after the recent easing of auto loan measures, they are still currently below the 2H15 average. Crude oil prices are also currently hovering just under the US$50 per barrel handle, which are close to the 2H15 average.

"MAS core inflation accelerated from +0.8 per cent YoY in April to +1.0 per cent YoY in May, the fastest pace since March 2015. This was led by a pickup in services inflation as the reduction in foreign domestic worker concessionary levy since May 2015 faded.

"MTI-MAS reiterated that MAS core inflation is still expected to pick up gradually over the course of the year, albeit at a mild pace given the weak external price outlook, subdued economic growth prospects and a reduction in labour market tightness. This suggests that the projected MAS core inflation trajectory will continue to overshadow the negative headline CPI prints in the consideration of the appropriate monetary policy stance.

"Our 2016 forecast for headline and core inflation stand at -0.4 per cent and +1.0 per cent YoY. The official forecasts for headline inflation are at -1.0-0.0 per cent and core inflation in the lower half of the 0.5-1.5 per cent YoY. For the first five months of 2016, headline CPI have slipped by 0.9 per cent YoY, whereas MAS core inflation rose by 0.6 per cent YoY for the same period."

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