Chart of the Day: See how inflation will suddenly pick up in 2015

Growth, however, will be painfully slow.

Headline inflation has remained low (1.2% YoY in July). However, DBS claims that it doesn’t reflect reality nor what lies ahead. Curbs in car loans last year and increase in COE quota over the past months have brought about decline in the COE premiums. With private transport cost having a high weightage of 11.7% in the CPI basket, it is no surprise that the headline CPI inflation readings have been benign.

DBS says that these are all policy-driven. Underlying cost pressure within the economy has been high. That explains why the core inflation reading has occasionally been higher than the headline number. Higher business costs due to wage pressure and rapid increase in rental have been passed on to consumers. And with both factors unlikely to ebb in the near term, inflation is set to rise in 2015.

DBS has lowered its inflation forecast for 2014 to 1.5% from 2.1% previously. However, inflation is expected to rise to 2.8% in 2015.

Inflation will be higher and growth is set to remain slow. But the Monetary Authority of Singapore is unlikely to change its policy stance as the downside risk to growth remains manageable. DBS expects the authority to maintain its current policy stance of a gradual appreciation of the Sing NEER in the upcoming review in October.