Singapore disinflation not a concern for now

WHETHER Singapore is experiencing disinflationary pressures and what that might mean for the economy were the inevitable questions that followed Monday's inflation release showing that consumer prices in October barely rose 0.1 per cent from a year ago.

This was the lowest monthly headline inflation rate since December 2009 and the fifth consecutive month of slowing inflation, and prompted private-sector economists to highlight the "deepening disinflation" and the emergence of a "disinflation dynamic".

Singapore is not alone in the trend of slowing price rises this year. Consumer price inflation has also been weak elsewhere in Asia, notably in China and South Korea. In America, UK and the eurozone, price increases are falling short of their central banks' inflation targets. The eurozone, in particular, is fighting off deflationary pressures which have become a source of concern for the global economy.

To be sure, disinflation - where prices are still rising, just at a slower pace - isn't usually a cause for concern. Indeed, it would spell relief for Singapore consumers and demand, after three years of persistently high inflation that only began to ease this year. What would be damaging to an economy is deflation, or falling prices. If businesses and consumers believe that goods will cost less in the future, they will be inclined to postpone investing or spending, and demand dries up. That could have a knock-on effect on wages and eventually public tax revenues.

In any case, the disinflation was anticipated. The central bank said last month that weaker COE premiums and housing rentals could push headline inflation down to under 0.5 per cent in this final quarter of 2014. In addition, MAS core inflation - which strips out accommodation and private transport costs, and is what Singapore's central bank uses to gauge price stability and decide on policy shifts - has not eased as much as the headline figure. In fact, most economists believe that wage pressures will continue to filter through to services costs - as economic restructuring keeps the labour market tight - and that this will be reason enough for the central bank to stick to its relatively tight monetary policy stance at the next review in April.

For the first 10 months of the year, core inflation was 2 per cent, while headline inflation was 1.3 per cent. These rates remain within the central bank's forecasts - though those were cut last month to 2-2.5 per cent for core inflation and 1-1.5 per cent for headline inflation.

The Monetary Authority of Singapore (MAS) cautioned at a media briefing on Tuesday not to read too much into monthly indicators. Discerning the momentum over time is more important, MAS said. This is because inflation conditions in an economy as open as Singapore's reflect myriad factors, both external and domestic, such as the recent plunge in oil prices and restructuring costs stemming from labour costs.

Still, with the "disinflation" term now in the news and with heightened uncertainty over oil prices and how the costs of restructuring might feed through to general prices, perhaps there is room for the central bank to shed more light on how it views Singapore's current bout of disinflation and how this might affect the economy.