Here's solid proof that car loan curbs are distorting Singapore inflation

Inflation to double its pace in April.

The introduction of car loan curbs have been distorting Singapore inflation as April figures are expected to spike up. According to DBS, the headline number is likely to register 3.2% YoY in Apr14. This is more than double the pace of 1.2% recorded in the previous month and comes on the back of the lapsing in the high base effect.

Here's more:

March CPI inflation turned out pretty much in line with our prediction (actual: 1.2% versus DBSf: 1.3%) as that was the first step in the “normalisation” of the inflation reading. 

Essentially, the headline number has been so highly distorted by the curbs on car loans introduced by the MAS early last year. That brought about the sharp corrections in the COE premiums and led to the lower than usual inflation readings over the past 12 months. But by April, inflation will rise sharply when the earlier policy effects fade-off. 

Anything about 3% or higher should not come as a surprise as inflation reverts back to its original trendline. However, the twist to the story is that the Land Transport Authority has recently announced that it will raise the COE quota during the May to July period by 32% to 4,019 per month, as compared to 3,043 per month in the preceding three months. 

Note the private transportation cost accounts for a relatively large weightage of about 11.7% of the entire CPI basket. Higher COE allocation could imply softer car prices ahead, and consequently on CPI inflation. Nonetheless, this year could also mark the first time since 2007 where the core inflation will average higher than the headline inflation. 

Domestic cost pressure, particularly stemming from a labour crunch is the primary source of inflation. And firms are expected to continue to pass on accumulated costs to consumers, leading to broad-based price increases across the economy. Ultimately, the message is that underlying cost pressure within the economy is still high even if headline inflation suggests otherwise.