Singapore's December inflation predicted to hit 2.2%

Base effect is at work.

According to DBS, December CPI inflation will likely register 2.2% YoY, down from 2.6% previously. While it looks like a moderation in price pressure, it should be noted that base effect is at work. Beyond that, domestic inflationary pressure remains high.

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Rental and labour cost are still driving overall business cost higher. These higher costs got passed on to consumers in a wide spectrum of consumer items in recently years and importantly, these factors are domestically driven.

In addition, COE premiums having corrected from the earlier peak due to the tightening in car loans, are climbing higher again. And it’ll probably get worse with average monthly COE quota likely to fall further by about 12.3% between Feb-Apr14, compared to the period Aug13-Jan14.

This makes for further increase in premiums, which is currently hanging around the SGD 70-80K range (exclude motorcycle).

As policymakers are determined to reduce the traffic congestion problem and to encourage the commuters to switch to public transport, high COE premiums are here to stay for a long while unless demand moderates somehow.

And the pass-through effect on inflation will imply significantly higher inflation in the coming months. Our assessment is that inflation will rise sharply from April onwards when the base effect from the earlier tightening wears off. We maintain our view that inflation will zoom pass the 3% mark and approach the 4% level by April. Full year inflation will average 3.0% compared to 2.4% in 2013.