Rise in inflation seen continuing into 2014

[SINGAPORE] Singapore's inflation is on a zig-zag path, creeping back to 2 per cent in October due to higher food and car prices, even though rebates for households contained the price increase. But economists believe the upward trajectory of prices will continue into 2014, as higher wages are passed on to consumers.

The bounce back in October inflation data - up from September's surprise easing to 1.6 per cent - was partly due to a pick-up in certificate of entitlement (COE) premiums, which the government expects to remain volatile in the short term as the market adjusts to the pending re-categorisation of COEs.

Economists polled by Bloomberg had been expecting a marginally higher 2.1 per cent rise in CPI in October from a year ago.

In their joint statement yesterday, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said private road transport costs rose by 2.7 per cent after declining by 2 per cent in the previous month. In September, a correction in car prices occurred due to high base effects.

But beyond car prices, October's CPI increase was also a result of food inflation, which stood at 2.5 per cent last month compared to 2.4 per cent in September.

While part of this was due to slightly steeper price increases in non-cooked food, more expensive prepared meals at restaurants and hawker centres also nudged food inflation higher.

Indeed, MAS core inflation inched up to 1.8 per cent from 1.7 per cent in September, due to stronger contributions from food and oil-related items.

The MAS core inflation measure excludes private road transport costs and accommodation costs. The rise in the latter mellowed to 1.9 per cent in October from 3.9 per cent the previous month, thanks to this year's final disbursement of Service & Conservancy Charges (S&CC) rebates for HDB households.

UOB economist Francis Tan told BT: "There were rebates this time which brought accommodation costs down - otherwise we would've seen a higher (inflation number). There's no rebate in November, so inflation should edge higher going forward."

Indeed, the MAS and MTI yesterday cautioned that headline inflation could "rise further" in November, "as the effect of the October S&CC rebates dissipates and COE premiums increased in October".

"MAS core inflation is expected to be higher in November 2013, partly on account of a low base a year ago," they added.

While headline inflation is projected to come in at 2.5-3 per cent in 2013 and 2-3 per cent in 2014, the government expects core inflation to rise over the next few quarters, and average 1.5-2 per cent in 2013 and 2-3 per cent in 2014.

Said ANZ economist Daniel Wilson: "Rising restaurant prices may be an early sign that this pass-through to core (inflation) is intensifying."

Added Mr Tan: "The risk of inflation pick-up rests on domestic costs such as wages and rentals. Particularly for wages, the impending increase in the qualifying salaries for employment passes (January 2014) and another round of foreign worker levy increase (July 2014) will add on to the wage-bidding war in the currently tight labour market. Labour costs of the service industry will be impacted more as they tend to have higher labour input content."

However, OCBC economist Selena Ling believes that such pass-through effects "have been less than expected", highlighting how services inflation eased to 2.5 per cent in October from 2.7 per cent in the preceding month, led by slower increases in the costs of recreation & entertainment and holiday travel.

"The government keeps warning about core inflation going up, but actually, we haven't really seen that acceleration effect yet," said Ms Ling, who yesterday downgraded her full-year growth forecast of headline CPI from 2.8 per cent to 2.4 per cent.

"CPI inflation for the first 10 months of this year is averaging only 2.4 per cent, and there appears to be little reason to expect a sudden uptick in inflation, especially from the imported inflation front, for the remaining two months of the year," Ms Ling added.

While Bank of America Merrill Lynch economist Chua Hak Bin also thinks it likely that this year's CPI will fall below the government's projected range of 2.5-3 per cent - he forecasts inflation to average 2.3 per cent this year - he, like UOB's Mr Tan, believes the pass-through of domestic costs will become stark in 2014.

"It'll be a different story in January ... A lot of wage adjustments are lumpy, and they tend to happen at the start of the year. We'll probably get a feel of how hefty they are, I suspect, only in the January and February inflation numbers. Chinese New Year is also a popular time for price adjustments as well," noted Dr Chua.