Singapore's inflation edged up to 2% in October

On back of higher transport costs.

According to UOB Economic-Treasury Research, Singapore’s October inflation inched higher to 2.0% y/y (September was 1.6% y/y) as private road transport costs rose 2.7% y/y after declining 2.0% y/y in the previous month. 

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This was due to the uptick in COE premiums nearing levels seen at the start of this year before the central bank rolled out financing measures to ensure finance prudence amongst car buyers.

Since then, COE premiums had been declining steadily until recently when the announcement of a new COE re-categorisation rule changed the dynamics.

We think that private road transport costs will increase at an average of 1-3% y/y over the next few months as the demand for cars purchase falls into the self-fulfilling trap of car buyers anticipating higher prices ahead of the COE re-categorisation in Feb 2014.

As such, higher expected prices could lead the increase in current demand and in turn lead to higher future prices.

Accommodation costs rose slower to 1.9% y/y from 3.9% y/y in the previous month as there was a disbursement of the Service & Conservancy Charges rebates for HDB households in October.

Core inflation (which excludes housing and private road transport) also picked up pace and reached 1.8% y/y in October, compared to 1.7% a month ago, as food prices rose slightly.

In October, the MAS kept the ‘modest and gradual appreciation’ of the SGD NEER policy unchanged as they were concerned about the pick-up in consumer prices.

This policy should see imported inflation remaining subdued. However, the risk of inflation pick-up rests on domestic costs such as wages and rentals. Particularly for wages, the impending increase in the qualifying salaries for employment passes (Jan 2014) and another round of foreign worker levies increase (Jul 2014) will add on to the wage-bidding war in the currently tight labour market. Labour costs of the service industry will be impacted more as they tend to have higher labour input content.

With that, the MAS expect core inflation to trend higher and average 1.5%-2% in 2013 and 2%-3% in 2014. Our
forecast for core inflation in 2014 is 2.4%. We are still of the view that the MAS will keep its current policy stance
unchanged in the next policy meeting in 2014 and the SGD will continue its appreciation path against currencies of our major trading partners.

However, with our expectation that the QE tapering may only happen in March 2014 when Janet Yellen takes over the Fed chair, the USD/SGD will trade a notch higher and move towards 1.27/USD by 1Q 2014 and head towards 1.33/USD by year-end.