Pioneer Generation package helps ease inflation to 7-month low

One-off effect due to enhanced medical subsidies; other cost pressures still a concern

Published Thu, Oct 23, 2014 · 09:50 PM


HEALTHCARE costs in September rose at the slowest pace in close to three years, due to enhanced medical subsidies including the Pioneer Generation Package. While this helped to push last month's headline and core inflation readings lower than expected, economists warn that other cost pressures still remain.

Consumer price inflation eased again in September - falling to a seven-month low of 0.6 per cent - as drops in housing and transport costs offset higher food prices.

The median forecast of 20 economists polled by Bloomberg before the Department of Statistics released the data on Thursday was for a 0.9 per cent year-on-year rise in the consumer price index (CPI) - the same as August's inflation rate.

Core inflation - which strips out the costs of accommodation and private road transport - moderated in September as well; it edged down to 1.9 per cent from August's 2.1 per cent.

The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said in a joint statement that the further easing in September core inflation was "largely on account of the enhanced medical subsidies which caused a one-off reduction in the level of healthcare services cost".

Services inflation slowed to 1.7 per cent in September from 2.1 per cent in the preceding month.

Said MAS and MTI: "This was mainly due to the moderation in the increase in medical and dental treatment fees, from 4.6 per cent in August to 2.4 per cent in September, which reflects the impact of enhanced medical subsidies, including the Pioneer Generation Package."

Indeed, healthcare inflation moderated significantly from 3.4 per cent in August to 1.8 per cent in September - the slowest pace since October 2011.

"However, the contributions of telecommunication services, tertiary education and air transport were higher compared to August," MAS and MTI added.

Thus, economists cautioned against over-enthusiasm about the lower CPI figures - especially since core inflation "remains sticky" around the 2 per cent mark.

Said Bank of America Merrill Lynch economist Chua Hak Bin: "It may be a bit deceptive to conclude that the rest of the population is seeing lower inflation pressures, because it's just a one-off effect on the growth rate and only for a certain group of citizens. Just because core inflation has slipped below 2 per cent doesn't mean the central bank is going to be less worried about pressures coming from wage costs."

ANZ economists Daniel Wilson and Glenn Maguire agreed: "Once dynamics such as the enhanced medical subsidies which caused a one-off reduction in the level of healthcare services cost dissipate, a gradual uptrend in core inflation should continue."

Economists expect this to be driven in part by higher food prices. In September, food inflation was higher at 3 per cent against 2.9 per cent a month ago, because of a steeper increase in the prices of prepared meals.

Falling housing and transport costs were able to offset this, though. As a result of the soft housing rental market, accommodation costs fell by 0.6 per cent, extending August's 0.2 per cent decline - the first drop into negative territory since 2010.

Private road transport costs were lower by 2.8 per cent after falling by 2.9 per cent in August, reflecting a more moderate decline in certificate of entitlement (COE) premiums relative to a year ago.

Economists such as UOB's Francis Tan and Jimmy Koh believe that both private road transport and accommodation costs will continue to "contribute negatively" to headline inflation for the rest of 2014. "In particular, accommodation costs will remain subdued given the large supply of newly completed housing units and the existing housing cooling measures remaining in place."

Following September's lower-than-expected inflation number, both UOB and OCBC have revised their 2014 headline inflation projections downwards to 1.2 per cent.

This is in line with the official government forecast, which was lowered by MAS last week to 1-1.5 per cent (from 1.5-2 per cent earlier). The central bank also narrowed its 2014 core inflation forecast to 2-2.5 per cent, compared to 2-3 per cent previously.

In 2015, headline inflation is expected to come in at 0.5-1.5 per cent, while core inflation is projected to average 2-3 per cent.

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