Record high COE premiums trigger sudden inflation spike

COE premiums at $83,600, seriously?

According to Barclays, headline CPI inflation reaccelerated to 4.7% y/y in September after two months of moderation (August: 3.9%). This was above itsforecast and the consensus expectation of about 4.4%. The key reason for the pickup was a surge in the price of car ownership licenses (COEs) in August, which typically affects car prices in the CPI with a one-month lag. We underestimated the extent of this pass-through.

Here's more from Barclays:

Due to a cut in the supply of these licenses, COE premiums (weighted average of Categories A, B and E) rose 40% y/y, or 10% m/m, to a record high of SGD83,600. As a result, private road transport costs surged 11% y/y in September (August: 6.3%) – the highest print year-to-date.

The Monetary Authority of Singapore's core inflation measure, which excludes the costs of accommodation and private road transport, was steadier, although it picked up to 2.4% y/y in September from 2.2% in August. Core inflation has been sticky and high from a historical perspective due to the pass-through of higher labour costs to services prices.

In September, the cost of household services rose due to higher costs to hire foreign domestic helpers. In addition, the cost of fuel and utilities edged up as LPG tariffs climbed 10% m/m.

Inflation has generally taken a step down from H1 (average: 5.5%). However, the moderation in the headline rate will not be smooth, owing to: 1) fluctuations in COE premiums, which corrected in September and stabilised in October; and 2) base effects associated with the discontinuation of government rebates for housing service and conservancy charges, which used to be disbursed in every last month of the quarter (so inflation will likely rise in December).

Following the uptick in inflation in September, we expect headline inflation to moderate to close to 4.2% in October. Nonetheless, we think inflation will likely average 4.6% y/y this year, slightly above MAS’s earlier 4.0-4.5% target range.