The Business Times

S'pore prices dip for first time in 5 yrs

But economists do not see deflationary trend as they expect wage pressures to remain

Published Tue, Dec 23, 2014 · 09:50 PM


SINGAPORE'S headline inflation fell into negative territory in November, dropping to -0.3 per cent from 0.1 per cent in October. Although this marks the country's first technical deflation in five years, economists described the below-zero figure as a blip, and do not expect it to last for long.

"We shouldn't be too quick to cry 'deflation,' since deflation needs to be established as a trend, and not as a mere data point," said Mizuho economist Vishnu Varathan.

"Core inflation, while easing, is still stable at 1.5 per cent, so deflation expectations just aren't there. The labour market remains fairly tight as well, and wage pressures are going to continue."

Economists from DBS and UOB were also reluctant to use the d-word, since last month's fall in consumer prices was largely due to base effects associated with fluctuations in car Certificate of Entitlement (COE) premiums - and not because of a lack of demand.

Said DBS economist Irvin Seah: "It's more accurate to call this disinflation, because we're not seeing a prolonged period of price declines. November was only one month, and other economic indicators - our unemployment rate, our growth rate - are still doing alright."

According to some analysts' estimates, private road transport costs - which declined by 7 per cent after October's 5.6 per cent decrease - took off as much as one percentage point from November's headline figure.

Said UOB economist Francis Tan: "With prices contracting for the first time since December 2009, people may start to worry about deflationary spirals. But they shouldn't put too much wait on this negative number... Maybe we'll see one more month under zero, but I don't see this continuing into 2015. In fact, prices could trend higher when base effects wear off and oil prices go back up."

Mr Seah thinks headline inflation will rise above one per cent in Q2 2015, and stay above 2 per cent in the second half of next year.

November's showing follows five consecutive months of disinflation - where prices were still rising, just at a slower pace - so economists had already been expecting a negative headline inflation figure. The median forecast of 13 economists polled by Bloomberg before the Department of Statistics (DoS) released the data on Tuesday was -0.2 per cent.

Except for food, price increases for other major categories eased in November. Accommodation costs were 1.2 per cent lower due to the soft housing rental market, extending the one per cent correction in October. Services inflation moderated to 1.4 per cent from 1.7 per cent given lower holiday travel costs, and a smaller rise in household services costs and medical treatment fees.

But food inflation rose to 2.9 per cent last month from 2.8 per cent a month earlier, amid more expensive fruits, vegetables, and prepared meals.

Core inflation - which excludes the costs of accommodation and private road transport - eased from 1.7 per cent in October to 1.5 per cent in November - the lowest figure since April last year. This was mainly due to a smaller increase in services fees.

While the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) reiterated in joint comments their 2015 inflation forecasts (headline at 0.5-1.5 per cent and core at 2-3 per cent), they cautioned that these could come in slightly lower "should global oil prices be sustained at current low levels".

Even though Stanchart economist Jeff Ng and Citi economist Kit Wei Zheng see a chance for monetary policy easing in 2015, they qualify that core inflation would have to come down quite a bit for that to happen. Said Mr Kit: "Core hovered at or below 1-1.5 per cent in 2005, H1 2007, and much of 2013, but MAS did not ease ... Greater conviction over easing would require cracks in the tight labour market, and further reduction in inflation expectations."

Most economists see that as a distant spectre for now. Said Mizuho's Mr Varathan: "I suspect the on-the-ground perception of inflation doesn't gel with November's (negative figure). In fact, unless you're looking to buy a house or car right now, your view is likely to be slightly inflationary considering the risks to food prices... You can go home singing about deflation all you want, but if you're betting on getting a full-sized prata for 50 cents, it's just not happening, mate."


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