Singapore inflation to average 5% in 1H12

Blame it on the tight COE situation and rising rentals.

According to DMG Research, headline inflation rose by 5.0% yoy in May, a slight easing from Apr’s 5.4% increase. However, this was better than consensus expectations for a 5.1% rise. Core inflation (excluding accommodation and private road transport) was unchanged from the previous month at 2.7% yoy in May.

Here's more from DMG:

Keeping headline inflation elevated in May were food prices, housing and transport costs. On a yoy basis, food prices were up by 2.5%, while housing and transport costs climbed 8.2% and 9.2% (on the back of still high COE premiums) respectively. However, helping to mitigate the price pressures from accommodation and private transportation costs were lower oil prices, which MTI-MAS estimated eased from 8.9% in Apr to 7.8% in May. Also helping to soften the impact of still-elevated accommodation cost was the disbursement of rebates for services & conservancy charges (S&CC) for HDB households.

It looks like inflation is likely to average 5.0% in 1H12 (similar to MTI-MAS view) on the back of the tight COE supply situation and rising rentals. Also adding to the price pressure would be the tight labor market and government policies to restrict the use of foreign labor and raise the wages of services sector workers like bus drivers and cleaners.

However, we expect inflation to ease in 2H12, averaging 3.2% yoy, on the back of slower global growth, weaker oil prices, the government’s responses to mitigate domestic conditions driving inflation higher and favorable base effects. This means that headline inflation should remain above its historic average of the past decade of 2.1%. We continue to maintain our headline inflation forecast of 3.8% for this year, which is within MAS and MTI’s estimates of 3.5-4.5% for 2012.

As for exchange rate policy, we do not expect any changes to MAS’ policy stance of a slight appreciation of the Singapore dollar to counter existing inflationary pressures despite downside risks to growth, unless the external environment deteriorates sharply.