Singapore safe from deflation danger, for now

November's CPI may see first negative inflation reading in 5 years

Published Tue, Dec 2, 2014 · 09:50 PM


DEFLATION has emerged as a new global concern, as oil prices plunge and growth slows. In Singapore, however, the alarm bells aren't ringing yet. (see infographic)

Singapore may see its first negative monthly inflation in five years before the year's end with the release of November's consumer price index (CPI), but most economists see no reason to expect damaging deflation - a persistent fall in prices typically triggered by a sharp contraction in demand.

Deflationary pressures so far have shown up in Singapore as a bout of disinflation - slowing price increases - that is expected to extend into the new year.

The recent slide in the price of oil has amplified other Singapore-specific disinflationary factors that were already there: the softening property market and lower home rentals, car certificate of entitlement (COE) premiums falling from last year's highs, and healthcare subsidies bringing down medical costs. ''Fleeting negative headline CPI prints from the supply-side must not be confused with demand-side deflation,'' said Mizuho Bank economist Vishnu Varathan.

Compared to the last bout of disinflation that Singapore experienced in 2009, during the global financial crisis, recent low inflation does not signal a slump in aggregate demand, said CIMB economist Song Seng Wun.

''In fact, real incomes may even be lifted slightly by lower inflation. Psychologically, people may feel that they are better off with lower energy costs . . . that could help support consumption too,'' he said.

Lower oil prices could be positive for consumers and a boon for Singapore's exporters to the extent that they boost export demand from developed economies, said Credit Suisse economist Michael Wan.

Hence, even if the headline inflation rate here slips into negative territory for November - October's inflation rate was already 0.1 per cent - that should be seen as a ''negative distortion'', said Barclays economist Leong Wai Ho. He thinks core inflation will keep stable at 1.5-2 per cent in the coming months, which would show that demand conditions have not weakened materially and there are no undue deflationary forces.

This is in line with the government's view, that core inflation will ''remain firm'' due to persistent wage pressures that will continueto filter through to the cost of various services. The authorities project core inflation of 2-3 per cent in 2015, but a lower 0.5-1.5 per cent headline inflation rate due to the anticipated rise in the supply of car COEs and housing units.

Other readings are less sanguine, suggesting that it's more than just a supply-side question. Manu Bhaskaran, founding director of economic consultancy Centennial Asia, sees other disinflationary forces at work.

''Higher costs and a loss of profitability and competitiveness that are causing companies to re-engineer through downsizing, relocation, exiting Singapore, or pressing suppliers to reduce prices of inputs . . . These are inherently disinflationary,'' he said.

Pointing to weak consumer spending, Citi economists Kit Wei Zheng and Yap Kim Leng said: ''While the tight labour market will continue to raise business costs, weak domestic demand will cap pricing power and increasingly force businesses to absorb higher costs in their margins.''

In a report on Monday describing Singapore's inflation as being ''at perilously low levels'', Mr Bhaskaran also said that he thinks the Monetary Authority of Singapore (MAS) ''has to loosen monetary policy''. ''There is virtually no inflation risk but there is a growing risk to economic growth. If anything, the risk is of disinflation as export competitiveness is gradually eroded by the tight labour market and rules on employing cheaper foreign workers.''

The Citi economists too do not rule out central bank easing in April 2015, though they see a greater 40 per cent chance of a reduction in the slope of the band in October next year. But they think that without cracks surfacing in the jobs market, core inflation falling under 2 per cent may not be enough to sway the central bank from its current position.

Indeed, the consensus view for now is still that cost pressures emanating from the tight labour market will keep the central bank in its current policy position of allowing the Singapore dollar to appreciate against a basket of its trading partners' currencies to ward off imported inflation.

''MAS will require greater comfort about latent wage pressures diminishing. For now though, tight labour market conditions make for tied hands at the MAS,'' said Mr Varathan. In his view then, the lower inflation still ''falls short of triggering a dovish response'' from the central bank.

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