Skyrocketing transport costs drove inflation down in September

No thanks to car loan curbs and higher COE quotas.

Inflation will remain benign for now but the effects of the policy behind it will be transient.

According to a report by DBS, the headline number due today is expected to register 1.2% YoY. Though this is up marginally from 0.9% in the previous month, it is still low by previous year’s average and underscores the existing policy effects.

DBS adds that financial curbs on car loans and higher COE quota have been the primary reasons behind the benign inflation. Indeed, transport cost has been the main driver of the low inflation for most parts of the last 16 months and the sub-index has fallen by about 1.8% YoY in August. 

But this is mainly policy driven and the effects will be transient. COE premiums fell by about 20% between April to May this year. Though this lowers the trajectory of the transport CPI index relative to the level last year, the base effect will dissipate going forward. 

And with the high weightage on private transport cost within the CPI basket, inflation will stay low for now but will rise rapidly there after. This is one of the main reasons why the headline number will rise from 1.5% on average this year to 2.8% in 2014.

Here’s more from DBS:

However, there is one factor that may offset the increase in transport inflation. Housing CPI inflation has fallen by 0.1% YoY in the previous month. While the dip is marginal, this is the first time since Mar10 that housing inflation recorded a negative figure. 

Essentially, rental has been sliding and the property market continues to cool under the weight of the slew of macro-prudential measures introduced by the government in recent years. If rental continues to moderate, expect housing CPI inflation to weigh down on the headline number in the coming months.