Why Singapore inflation could trend above the 2% mark

2.1% inflation forecast has been penciled in.

According to DBS, Singapore inflation will stay above the 2% mark in Sep13 and will likely continue to trend higher. A reading of 2.1% YoY has been factored into our forecast in September and risk is on the upside.

Here's more from DBS:

The headline number came off sharply in March due to drastic curbs on car loans by the Monetary Authority of Singapore.

That brought about a sharp correction in the COE premiums and consequently on inflation. At one stage, premiums were on average about 15% down from the levels in Apr-May. And note that private transport CPI has a significant weightage of about 11.7%, of which it is mainly dependent on the COE premiums.

But this high base effect from COEs is transient. Once this effect lapses, inflation will pick up again. In fact, premiums are already rising and the high base effect is likely to have been eroded.

For example, average premium is already 29% higher than the bottom in AprilAnd in September, COE premiums are about 8% higher than the level in the same period last year. So higher COE premium is certainly one of the key driver of inflation.

Beyond the COE premiums, underlying cost pressure within the economy remains extremely high. The labour market is still tight and higher business costs are cascading into higher consumer inflation.

We expect inflation to inch towards the 3% mark in the coming months before testing the 4% level by April next year.