Painful inflation to remain high at 5.6%

Blame it on the housing and transport cost components which spark the rising inflation.

According to DBS, both are expected to clock readings of above 10% in the December 2011.

Here’s more from DBS:

CPI inflation for Dec11 as well as industrial production index for the same month is on tap today and tomorrow respectively. The headline CPI inflation reading is expected to remain fairly high at 5.6% YoY, reflecting the price stickiness in the domestic economy amid external disinflationary pressure from a slowing global economy. The housing and the transport cost components, which together accounts for about 41% of the CPI basket, will remain the key drivers.

Both are expected to clock readings of above 10% in the month. And given the aim to bring car population growth rate down to 0.5% this year, from 1.5% previously, chance is high that COE prices could inch higher in the coming months and create upside risks to inflation. Meanwhile rental cost is expected to remain high too. It’ll take time before the effect from the latest round of property cooling measures is manifested in the property prices and rentals.

Going forward, wage pressure will continue to remain an “invisible” threat while food inflation may inch slightly higher. Festive season demand and supply side disruptions from recent floods in neighbouring food exporting countries could send food prices higher in the near term. Overall, inflation will ease gradually on account of its base effect.

While we believe inflation will ease to average 3.0% this year, upside risk remains. As such, we do not expect the MAS to ease off in its exchange rate policy stance. The central bank is more likely to maintain its current stance of a gradual appreciation of the Sing NEER to keep the lid on inflation as well as given the low risk of a recession.