S'pore inflation negative for 21st straight month, but core inflation holds steady

Singapore

SINGAPORE may have recorded its 21st straight month of negative inflation in July - its longest stretch of falling prices on record - but economists continue to stress that the country is not in a deflationary spiral.

This is because the sub-zero headline reading - at -0.7 per cent in July from a year ago, said the Department of Statistics (DOS) - has not been marked by broad-based and persistent price declines across the economy. Instead, economists emphasise that it has been "the usual suspects" weighing overall inflation down: car and accommodation costs, as well as low oil prices.

Indeed, core inflation, which excludes the costs of accommodation and private road transport, remains "sticky" in positive territory (at one per cent in July), in a reflection of how more than half the consumer price index (CPI) basket continues to experience price increases.

Said UOB economist Francis Tan: "Although Singapore's headline prices have been contracting for the longest on record - the previous record was in the 16 months between October 1975 and January 1977 - we will not label the current situation as a 'deflationary spiral', as the decline in prices were largely due to administrative measures applied on accommodation and private road transport costs." He said UOB is taking "special note" of the rising trend in core inflation. While July's 1 per cent was marginally lower than June's 1.1 per cent, he noted that core inflation has been "inching higher and higher" since the recent low of 0.2 per cent in November 2015.

ANZ economist Weiwen Ng added: "Higher inflation is more likely than deflation for Singapore, (where) low growth is not necessarily deflationary. Weak supply - that is, low productivity - is weighing more than sluggish demand at the margin. Furthermore, the fading off of the disinflationary effects of oil as well as budgetary and other one-off measures will see both headline inflation and core inflation picking up gradually over the course of this year."

Indeed, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) reiterated on Tuesday that headline inflation "likely troughed in Q2, and is projected to rise in the coming months". The government expects headline inflation to come in at -1 per cent to flat for 2016.

Core inflation, meanwhile, is projected to pick up gradually to average around 1 per cent for the full year. MAS and MTI said: "However, the pace of increase in (core inflation) will be restrained by the weak external price outlook, subdued economic growth prospects, and the reduction in labour market tightness."

While July's core inflation reading was exactly in line with the market's forecast, the contraction in headline inflation was slightly larger than private-sector economists had expected; the 19 economists polled by Bloomberg had been expecting an overall figure of -0.5 per cent.

Among the segments, housing & utilities, transport, and clothing & footwear posted negative readings in year-on-year terms - -4.3 per cent, -3.5 per cent and -1.8 per cent respectively. While the former two segments have been familiar drags on headline CPI, July's drop in clothing & footwear prices reflected the steeper discounts of the Great Singapore Sale. Indeed, MAS and MTI noted that the overall price of retail items registered a decline of 0.2 per cent, compared to an increase of 0.5 per cent in June.

Readings of all other segments were in positive territory; education was highest at 3.6 per cent, followed by household durables & services at 3.2 per cent, and food at 2.1 per cent.

Still, overall services inflation was 1.6 per cent, unchanged from June. MAS and MTI said: "While the cost of education services rose more sharply, this was offset by a slower pace of increase in holiday travel expenses."

They added that the cost of electricity, liquefied petroleum gas & gas fell by a more moderate 12.7 per cent, against June's 13.7 per cent decline. This was due to a smaller decrease in electricity tariffs on a year-ago basis.

Looking ahead, Citi economist Kit Wei Zheng says it is too early to call an end to disinflation - even if headline inflation likely troughed in May. "The plunge in July NODX (non-oil domestic exports) suggests that external demand headwinds have persisted or even intensified into H2."

Most economists do not expect the central bank to ease monetary policy come October, unless Q3's GDP performance falls significantly.