Higher inflation pegged at 4-5%

MAS revised its forecast from 3-4% due to rising accommodation costs and private transport costs.

During the MAS’ Annual Report press conference, Managing Director Ravi Menon said, “This upward revision and renewed volatility reflect two factors. First, accommodation costs. Over the past few months, CPI accommodation costs were boosted by an unexpected surge in the number of tenancy contract renewals at current higher rental rates. This resetting of old rental contracts could persist into the second half of this year. We therefore expect accommodation costs to impact CPI inflation more strongly than previously."

He continued, "Second, private transport costs. COE premiums have risen faster than expected, reflecting rising incomes and sharp cuts in COE quota to its lowest in more than a decade.”

Menon stressed though that a better measure of underlying price pressures in economy is MAS’ measure of core inflation. “Core inflation excludes private road transport and accommodation costs, as these items are subject to short-term fluctuations. These items also do not affect the day-to-day outlay of most Singaporean households. Core inflation is the measure MAS monitors most closely, among a range of indicators,” he said.

Core inflation was much lower at 2.2% in April and May compared to headline inflation. Menon explained, “This reflects in part MAS’ pre-emptive tightening of monetary policy in April and October last year, which has helped to dampen some cost increases. A stronger Sing Dollar has helped, not just by filtering oil and food price increases, but also by providing a restraining effect on the economy. The strong exchange rate has capped upward pressure on prices.”

The projection for MAS’ core inflation remains unchanged at 2-3% for the whole of 2011, but they will continue to keep a close watch on inflationary pressures and developments in key export markets.