Inflation outlook under threat from extremely weak rental market: Deutsche Bank

Should deflation be a cause for concern?

Singapore's consumer price index (CPI) has been in the red for five straight months, with March inflation coming in at -0.3% year-on-year.

Although the negative prints have been blamed on weak commodity prices, a report by Deutsche Bank noted that fuel-related factors are not the only culprit behind the republic's deflation.

Food inflation has been remarkably muted in past months, while accommodation costs gave been falling due to the continued weakness in the rental market.

Deutsche Bank stated that while deflation risks are not yet substantial, the weak rental market remains a key threat to Singapore's inflation prospects.

"The key risk to the inflation outlook, in our view, is the rental market, which continues to show a substantial degree of weakness," noted Deutsche Bank economist Taimur Baing in the report.

Data from SRX Property showed that private rents have declined 11.1% from their January 2013 peak in March, while HDB rents are down 5.8% compared with its peak in August 2013.

In spite of this risk, Baing stated that deflation may well disappear for the time being following the rebound in fuel prices in April.

"Negative CPI print is not unusual in Singapore; in the aftermath of the global financial crisis, on the back of sharp fuel price correction and slowing activities, negative inflation persisted through the second half of 2009. Looking at the index of the headline (seasonally adjusted) and core CPI since the beginning of last year, we note that price trend has flattened modestly, but not alarmingly. Indeed, with fuel prices rebounding in
April, deflation may well disappear for the time being," he said.