CPI inflation forecast to average between 3.5% and 4.5% in 2012

MAS says CPI-All Items inflation is expected to remain elevated and volatile over the coming months.

The Monetary Authority of Singapore noted:

CPI-All Items inflation moderated from 5.5% in Q4 2011 to 4.9% in Q1 2012 due to the lower contribution of oil-related items, food and, notably, cars. Meanwhile, accommodation cost, which remained the single largest contributor to CPI-All Items inflation, increased by 10.1%, led by the sharp rise in residential property rentals.

Services inflation rose from 1.6% in Q4 2011 to 3.2% in Q1 2012. Around 1% point of the increase in services inflation was due to the removal of radio and TV license fees last year. There was also a more rapid pass-through of higher wage costs to prices of consumer services such as healthcare and education services.

Reflecting the pickup in services inflation, MAS Core Inflation, which excludes the costs of accommodation and private road transport, rose from 2.4% in Q4 2011 to 3.1% in Q1 2012. In April 2012, CPI-All Items inflation came in higher at 5.4%. The increase largely reflected the higher contribution from accommodation, which was due to the low base last year when the government disbursed a large quantum of S&CC rebates.

Car prices also rose sharply on the back of the recent surge in COE premiums. Together, accommodation and private road transport costs accounted for two-thirds of CPI-All Items inflation in April 2012. In comparison, price increases for services, food and oil-related items slowed. MAS Core Inflation thus edged down from 3.1% in Q1 to 2.7% in April.

CPI-All Items inflation could average around 5% in H1 2012, before easing gradually in H2. Accommodation cost will remain the largest contributor to CPI-All Items inflation this year as leasing contracts continue to be renewed at rentals that are considerably higher than those under existing contracts, especially in the HDB segment.

Despite the recent announcement of a smaller cutback in vehicle population growth rate in August, car prices are expected to remain a significant contributor to CPI-All Items inflation in the next few months. In addition, wages and other costs will likely continue to pass through to consumer prices, albeit at a more moderate pace than that during early this year. MAS Core Inflation will remain close to 3% in the next few months before easing gradually thereafter.

For the year as a whole, CPI-All Items inflation is projected to average 3.5-4.5%, while MAS Core Inflation will likely be in the range of 2.5-3.0%. Cost of accommodation and cars will together account for more than half of CPI-All Items inflation, while services and commodity-related items will each account for one-fifth.