Crazy inflation to rocket 70% higher than the 30-year historical average

High domestic inflation averaging 4.5% in 2012 is here to stay.

Here's more from DBS:

CPI inflation for June is due today while the industrial production index for the same month is on tap this Thursday. The headline inflation figure has stayed above the 5.0% YoY level since March. It has been easing gradually for the last 2 months and registered 5.0% in May.

But if one is hoping that it will finally dip below that, one will be  disappointed. Market is certainly not expecting that to happen and we tend to agree with that too. A 5.3% YoY forecast has been penciled into our forecast as we expect inflation to embark on a gradual easing trend only from July onwards. But that’s largely on account of the base effect.

Fundamentally, oil prices has eased recently and disinflationary pressure dominates in the external environment due to slowing global growth momentum. But the point is that inflation in Singapore is largely domestically induced. High  COE premiums and rentals as well as the continued increase in labour cost are driving domestic inflationary pressure. And ironically, the bulk of these have to do with policy changes. The reduction in COE quota to suppress vehicle population growth rate and the tightening in foreign labour policy via hikes in levies are good examples.

Plainly, these are self-imposed adjustments to the longer term growth strategies of the economy. So, as long as these measures remain in place, high domestic inflation is here to stay. Expect inflation to average 4.5% this year. Even if it eases off to 3.1% next year, it is still about 70% above the 30 years historical average of just 1.8%. This by itself marks a significant shift in the domestic economic structures where slower growth could potentially be  accompanied by higher than normal inflation.