Private road transport cost rebound drove Singapore inflation up to 2.5%

4 months of decline have ended.

According to UOB, Singapore’s inflation rose further in April to 2.5% y/y, in line with market expectations (2.6% y/y), and markedly higher than the 1.2% y/y rate recorded in March. However, on a sequential basis, headline prices actually decreased by 0.2%m/m.

Although the y/y CPI inflation was driven by broad-based increases in April, the marked rebound in the cost of private road transport (up by +5.7 % y/y reversing 4 straight months of decline and also exacerbated by a low base), rising overall foods cost (+3.1% y/y from 2.9% in March), and inflationary pressures from services-related segments (+2.7% y/y from 2.4%) were the key drivers for headline inflation.

Here's more from UOB:

Core inflation (which excludes housing and private road transport) also climbed higher to 2.3% y/y from 2.0% y/y, the highest since September 2012.

As we had highlighted in the earlier March CPI inflation report (dated23 April 2014), accommodation costs will not likely add much towards inflationary pressures this year given the large supply of newly-completed housing units and the existing housing cooling measures. Indeed, housing costs increase came in at a reduced pace of 0.7%y/y in April (from 1.2% in March and 1.5% in February).

Instead, the key inflationary risk in 2014 will still come from domestic cost pressures as Singapore’s labour market remains tight and employers having to compete with each other to attract workers, and thus driving up wages and will be manifested in higher services costs. Another round of foreign worker levies in Jul 2014 will add on to higher labour costs, particularly for firms with a higher share of foreign workers.

We reiterate our CPI-All Items inflation forecast at 2.8% for 2014 to reflect deteriorating sentiments in the imputed rentals of owner-occupied accommodation. However, we maintain our 2014 core inflation forecast of 2.4% as domestic cost pressures from the tight labour market remains the key source of inflation, particularly as firms are expected to pass on the increases in business costs onto consumer prices. The risk is that core inflation could exceed our 2.4% projection as it is already at 2.3%.

With rising core inflation expected for this year, we continue believe that the MAS will maintain their current monetary policy stance of a “modestly and gradually” appreciation in the SGD NEER in their next policy meeting in October later this year.