Singapore June inflation mired in negative territory

Singapore

SINGAPORE'S inflation rate remained in negative territory in June for the eighth consecutive month - in line with expectations - though it inched upwards to -0.3 per cent from May's -0.4 per cent.

This was driven by increases in the costs of services, food and private road transport, said the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) in joint comments.

Core inflation, which strips out accommodation and private road transport costs, clocked 0.2 per cent on the back of increased contributions from services and food costs, compared to the five-year low of 0.1 per cent in the month prior.

Core inflation is expected to "remain subdued" at around the current rate in the next few months, said MAS and MTI; headline inflation could ease further on the back of the expected increase in the supply of certificates of entitlement (COE) and newly-completed housing units.

For 2015 as a whole, inflation is now projected to come in at the lower end of the -0.5-to-0.5 per cent forecast by MAS and MTI. Core inflation is also expected to clock in at the lower end of the 0.5-to-1.5 per cent target range.

Barclays' economists said that headline inflation is likely to languish in negative territory for the rest of the year, owing to weakness in the housing rental market, further declines in private transportation on expanded COE supply and the slower pass-through of higher labour costs.

Citi economists Kit Wei Zheng and Yap Kim Leng suggested in a report: "With headline inflation expected to ease further, MAS may also see a chance that it could breach the floor of its forecast range."

And while core inflation is expected to remain muted, increased electricity tariffs from July and potentially higher food prices due to El Niño weather effects could nudge it upward in the coming months, some economists said.

In June, services inflation rose slightly to 0.5 per cent, as the higher costs of hotel stays and telecommunication services outstripped the decline in air fares and health-care services fees.

Food inflation rose to 2 per cent from 1.8 per cent in May on the back of bigger price increases for hawker meals and restaurant food.

Private road transport cost was up by 1.2 per cent, versus the one per cent rise in May, in line with COE premiums and the moderation in petrol pump prices.

However, transport inflation will likely head south in the second half of this year, said Merrill Lynch (Singapore) Asean economist Chua Hak Bin, pointing to the double-digit rise in COE supply for the August-to-October period vis-a-vis the May-to-July period. Headline inflation could also fall as a result of the recent slump in COE premiums, said DBS senior economist Irvin Seah.

Meanwhile, accommodation costs fell 2.6 per cent - after having fallen 2.5 per cent in May - in line with the soft housing rental market.

Though inflation was "conspicuously" absent in June, this is unlikely to prompt action in terms of fresh policy easing at MAS's upcoming meeting in October, economists said.

Mizuho Bank economist Vishnu Varathan said: "First, inflation is expected to remain within target. Second, and more importantly, negative inflation ought not to be confused for deflation. This is a key point that resonates with the MAS. That, to us, is the definitive policy guidance."

Earlier this week, MAS managing director Ravi Menon stressed that Singapore is not facing deflation as price declines have been "neither persistent nor pervasive", it was reported.

Instead, headline inflation is being weighed down by certain price items such as accommodation, while there have been moderate price increases in other items in the consumer price index (CPI) basket.

HSBC economist Joseph Incalcaterra said: "The central bank believes that inflationary pressures from the tight labour market will materialise in 2016; it is therefore unlikely to alter policy settings for the rest of 2015, barring any significant changes to the growth or inflation outlook."

MAS and MTI also said in their joint statement that higher oil prices and the waning effects of Budgetary measures such as the reduction in the concessionary foreign domestic worker levy could cause headline and core inflation to rise towards end-2015 and in 2016.

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