CIMB predicts inflation will soar beyond 4%

Find out what the 2 notorious culprits are.

Accordint o CIMB, headline inflation is not expected to dip in the next few months due to still-firm housing-rental revisions and costly private road transport.

Dec’s CPI rose 4.3% yoy, well ahead of market expectations (3.8%), though consistent with the firm's 4.2% (3.6% in Nov). Headline CPI rose 4.6% yoy in 2012 (5.2% in 2011). Excluding private road transport and accommodation, the MAS’s core CPI rose 2.5% (2.2% in 2011).

The MAS is predicting core CPI of 2-3% for 2013 as firm rentals and higher wages get passed on to consumers. "We concur," CIMB said.

Here's more from CIMB:

A rebound in Dec’s CPI was widely expected (from 3.6% in Nov) because of a surge in private transport costs (more expensive COE premiums).

Nonetheless, Dec’s headline inflation still overshot market expectations, climbing a seasonally-adjusted 0.9% mom or 4.3% yoy, the highest in three months. The usual suspects were transportation (+8.2% yoy, +6.2% in Nov) and housing (+6.7% yoy, +5.2% in Nov).

2012 CPI averaged 4.6% vs. 5.2% in 2011 with housing and transport behind the bulk of the increase (68% in 2012; 78% in 2011).

Food costs rose at a slower pace, up 0.1% mom SA or 1.5% yoy (1.7% in Nov) despite year-end festive demand. Together with cheaper communications, core inflation edged down to 1.9% yoy in Dec (2.0% in Nov), the first time it dipped below 2% since Mar 11.

Despite lower food prices, the MAS’s 2012 core inflation rose 2.5%, the highest in four years (2.2% in 2010); blame it on education, healthcare and other miscellaneous consumer service costs.

Supported by private transport costs (rising COE premiums on supply reductions) and a still-firm housing-rental market, we expect headline CPI to come in at about 4% this year, within the official 3.5-4.5% forecast.

While we expect COE premiums to stay elevated because of tight supply, price increases should level off and start to ease on basis effects. Further, while rental reversions could remain positive, housing-rental growth could taper off in 2H13 on basis effect and rising supply.

This would have an impact on headline CPI. Rentals accounted for 1% pt of CPI last year. In 2012, the CPI less imputed rentals for owner-occupied accommodation rose 3.6% (4.2% in 2011).