Hit by a truck: Recent transport tweaks pull 2014 inflation forecast to 2.1%

Higher COE quota, uglier inflation prediction.

Many might think cars are one of the insignificant factors affecting inflation, but in a country where cars are as important as food and shelter, the slightest changes are the biggest news.

According to DBS, they have lowered inflation forecast for 2014 to 2.1%, down from 3.0% previously. Although April CPI inflation did spike up as expected, the rise was slightly short of expectation. 

Here's more from DBS:

The headline number rose to 2.5% YoY, from 1.2% in the previous month but lower than our expectation of 3.2%. 

More importantly, the trajectory of inflation has been lowered due to more policy changes by the transport authority. The Land Transport Authority is raising the COE quota during the May to July period by 32% to 4,019 per month, as compared to 3,043 per month in the preceding three months.

Note the private transportation cost accounts for a relatively large weightage of about 11.7% of the entire CPI basket. And higher COE allocation naturally implies softer car prices ahead and consequently lower than expected CPI inflation.

So, while the base effect from last year’s car loan curb has lapsed and that inflation is beginning to “normalise”, the latest change in COE allocation will have an indirect impact on inflation. To account for this policy effect, we have lowered our full year inflation forecast for 2014 to 2.1%, down from 3.0%. 

However, inflation forecast for 2015 will remain unchanged at 2.8%. Domestic cost pressure, particularly stemming from a labour crunch will remain a primary source of inflation. And firms are expected to continue to pass on accumulated costs to consumers, leading to broad-based price increases across the economy. 

Latest core inflation (CPI inflation minus private transport and accommodationcosts) registered 2.3% YoY, which is the highest since Sep12. And as it is, core inflation will continue to rise on underlying cost pressure.