Private road transport costs predicted to grow 1-3%

Car buyers lured by more discounts.

According to UOB Economic-Treasury Research, private road transport costs over the next few months may grow by 1-3% y/y on a monthly basis, rather than the -0.6% y/y seen from April to August this year.

Here's more from UOB Economic-Treasury Research:

Private road transport costs remained benign over the past 5 months and grew only 0.2% y/y in August. This was a consequence of the tighter financing measures introduced to encourage financial prudence.

However, the recent announcement of the tweak in the Certificate of Entitlement (COE) categories, to be effective in Feb 2014, has caused consumers to bring forward their purchases.

This was due to expectations that COE prices in both Categories A & B will be higher next year. Together with the appealing discounts given by car dealers to reduce their inventories as another ‘carrot’ for attracting new car buyers, this renewed wave of buying may prompt COE prices to go on an upward trend.

In July, foreign worker levies were increased. That may have resulted in higher prices seen in the prepared food (2.4% y/y) and household services (9.0% y/y) segments in August.

Going forward, segments within the services industry with relatively higher labour input content will be affected the most and it will be of urgency to improve labour productivity and/or business operations efficiencies.

Until that happens, companies may make do with lower profit margins or may pass on the higher wage costs to final selling prices, and we see this as key risks to services inflation.

The dynamics unfolding in the private road transport segment will pose upside risks to headline inflation over the next few months.

Until a clearer picture emerges, we are expecting Singapore’s inflation to continue on a softening trend towards the end of this year. With that, we maintain our headline and core inflation forecast at 2.6% and 1.7% respectively.

Although recent inflation rates are a notch lower than what we have seen over the past 2 years, there are risks of pick-up in consumer prices due to the tighter domestic labour market condition.

With our expectations of a slow recovery in global growth that will benefit Singapore’s goods and services exports, we believe that the MAS will likely maintain the ‘modest and gradual appreciation’ of the SGD NEER monetary policy stance in their next policy meeting in October 2013.