Inflation forecast cut to 1.5-2.5% on lower car prices

But CPI-All items inflation to rise.

According to DBS, the Monetary Authority of Singapore (MAS) has lowered its full year inflation forecast to 1.5-2.5%, from 2-3% previously. The authority cited the decline in car prices due to lower COE premiums since April last year, as well as lower imputed rentals on owner-occupied accommodation as the reasons behind the downward adjustment.

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However, the central bank also pointed out that the “CPI-All Items inflation will rise in the coming months due to the low base a year ago when COE premiums fell” but that should ease in the second half of 2014.

This is particularly the case given that the Land Transport Authority has recently announced that it will raise 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. 

Higher COE allocation could imply softer car prices ahead. As such, officials believe that the impact from car prices on headline CPI inflation should be negligible on average for the full year. And with that, it was pointed out that the downward revision in the CPI forecastmainly reflects the weaker outlook for imputed rentals over the rest of the year due to large supply of newly completed housing units.

That said, the MAS has maintained its core inflation forecast at 2-3%. Note this is higher than the new headline inflation forecast. Domestic cost pressures, particularly stemming from a tight labour market, are highlighted as the primary source of inflation. 

This is consistent with our long held belief that labour costis the number one driver of inflation in Singapore. And firms are expected to continue to pass on accumulated costs to consumers, leading to broad-based price increases across the economy.

Potentially, this year could mark the first time since 2007 when the core inflation will average higher than the headline inflation. It not only illustrates the distortion from the car loan curbs that led to the corrections in the car prices, it also explains why the MAS has maintained its tightening bias in its policy stance despite lowering its inflation forecast. Ultimately, the message is that underlying cost pressure within the economy is still high.