Inflation may not slow sufficiently: HSBC

Facts
June CPI inflation rose to 5.2% y-o-y (vs. 4.5% in May), matching consensus and our forecast. Annual inflation rose for most categories, except for 'communications' and 'health care'.

On a seasonally adjusted basis, CPI rose 0.4% m/m sa (vs. 0.6% in May), but eased further on a 3m/3m SAAR basis (3.2% vs. 4.0% in May). In non-seasonally adjusted terms, headline CPI inflation declined 0.2% m/m (vs. 0.6% in May), led entirely by 'clothing & footware' and housing. Discounts offered during the annual Singapore sale were behind the monthly decline in 'clothing & footware' and housing was lower due to S&CC rebates given in June.

Core inflation (excluding food and energy) rose to 4.6% y-o-y (vs. 4.3% in May). On a sequential basis, core inflation rose 0.4% on an m/m sa basis (vs. 0.2% in May) and jumped on a 3m/3m SAAR basis (5% vs. 3.1% in May). The core inflation number tracked by the Monetary Authority, which excludes costs of accommodation and private road transport, rose to 2.3% y-o-y (vs. 2.1% in May) and 0.23% m/m sa (vs. 0.18% in May).

Implication
Inflation continues to display persistence in Singapore, reflecting tight capacity conditions and still solid demand.

Of course, the sequential (nsa) drop in CPI inflation in June was heavily distorted by the S&CC rebates and seasonal shopping discounts. However, annual inflation is holding firm and rising gradually. CPI inflation has average 5% y-o-y in the 1H2011, which is not very comforting for the MAS. Moreover, core inflation is on the rise.

However, the soft patch in global trade could ease inflation pressures in the near term. The MAS may, therefore, be cautious and possibly less intent to further tighten monetary policy this year as things stand now. That being said, today's inflation reading has heightened the risk that inflation may not slow sufficiently to trigger a pause.