September inflation seen to stay put at 5.7%

Full year inflation is now likely to average about 5% as it expands to other sectors.

In a statement, DBS said inflation is “not only sticky but is becoming more broad-based,” with wage pressure and food inflation rising in tandem with high COE prices.

The bank expects the previous month’s inflation rate to remain unchanged from August.

Wage inflation pressure is seen to worsen despite the 2.1% unemployment rate for 2Q11 as Singapore tightens its foreign worker policies.

According to DBS, the massive flooding in Thailand and its government’s introduction of a floor price on domestic rice production will also likely drive imported food prices higher.

Singapore and other neighboring net rice importing countries are seen to buy rice at a higher price before easing to 3% in 2012 on account of deflationary pressure from a weaker global growth outlook.

Economists and market watchers are also expected to watch industrial production for September, which will be released Tuesday, as the numbers will provide more clarity on whether the economy did indeed avert a technical recession (TR) despite having the recently announced advance GDP estimates showing so.

“Plainly, the set of advance GDP estimates is not the final verdict,” DBS said. “The figures are based on the higher frequency data from July-August period and numbers for September are projected. The GDP growth figures are still subjected to revision.”

Based on the advanced figures, the manufacturing sector is expected to clock an expansion of about 10-11% in September. But given the disappointing September nonoil domestic export (NODX) figure (-4.5% YoY, -9.3% MoM sa) announced last week, the final reading could fall slightly short.

DBS foresees an increase in production of 9.7% YoY on account of the continued strong run in pharmaceutical output, which more than offset the decline in electronics.

The figure, however, still falls slightly short of expectation and “will surely invoke another round of the TR discussion,” according to the bank.

"In our opinion, the revision to the final GDP figures will not be significant even if manufacturing comes in slower than expected as a possible upward revision in the services sector is likely to pick up part of the slack," DBS said.