Friday, August 24, 2012

Inflation in July eases to 4% but outlook stays grim

Business Times: Fri, Aug 24

[SINGAPORE] Finally, some relief on the inflation front but with a caveat.

Singapore's headline inflation eased to 4 per cent year on year in July - down from 5.3 per cent in June - on the back of slower increases in the cost of accommodation, private road transport and oil-related items, the government said yesterday. But overall inflation for the year could still surpass expectations if car prices pick up pace, it cautioned.

Core inflation - excluding accommodation and private road transport costs, which together accounted for 60 per cent of July's headline inflation - dipped 0.3 of a percentage point to 2.4 per cent in July. Core inflation could moderate further by year end, leaving room for the easing of monetary policy against the backdrop of slowing economic growth, economists said.

In July, accommodation cost inflation came in at 7.8 per cent, slowing from 10.8 per cent in June mainly due to the fact that rebates for service and conservancy charges (S&CC) were disbursed to HDB households in June 2011 but not this year, which boosted cost hikes in June.

Private road transport costs rose 5.9 per cent year on year in July, adding 0.8-point to headline inflation compared to 1.3 points in June due to the previous decline in certificate of entitlement (COE) prices as well as lower petrol pump prices.

The year-on-year increase in electricity tariffs slowed to 2.9 per cent, versus 12.5 per cent in June, while food and services inflation held steady at 2.3 per cent and 2.8 per cent respectively.

But healthcare prices increased by 5.1 per cent, and this remains a concern as it may impose a burden on households, said Tan Khay Boon, senior lecturer at UniSIM's School of Business.

While July's inflation rate of 4 per cent was the lowest since November 2010, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) expect headline inflation for 2012 to remain elevated and average 4 per cent to 4.5 per cent due to the low COE supply for cars as well as expected higher rentals, particularly in the HDB segment.

Bank of America Merrill Lynch's Chua Hak Bin sees the inflation rate at 4.3 per cent this year while Barclays expects 4.2 per cent though its economists acknowledge some upside risk given the volatility in COE premiums.

Meanwhile, core inflation is expected to come in slightly lower over the next few months, averaging 2.5-3 per cent for the whole year, MAS and MTI said in a joint statement.

With COE premiums on the rise in recent months - the COE quota for the period spanning August 2012 to January 2013 is lower compared to the previous six months - projections for 2012 headline inflation could be surpassed if car prices stay on an upward trajectory.

"COE premiums will remain sharply higher than a year ago given the current low COE supply. Should the recent surge in COE premiums continue, car prices could present an upside risk to the CPI-All Items inflation forecast," said MAS and MTI.

Still, there was good news in the results of the most recent bidding exercise for COEs which were announced yesterday after the inflation numbers were released. The COE premium for small cars, or those 1,600 cc and below, slipped to $66,889, offering some relief as it fell 9 per cent from a record $73,501 in the last bidding round on Aug 8.

In fact, the latest COE prices were lower across the board with the exception of the goods vehicles and buses category, where COE prices rose from $57,001 previously to $59,334. The COE premium for big cars, or cars above 1,600 cc came in at $88,002, versus $94,502 earlier, while the open category premium decreased from $95,034 to $93,990. Meanwhile, the COE for motorcycles fell 3 per cent to $2,013.

With small car COEs hitting record highs, consumers may be holding back to see how the market reacts, suggests Cosmo Automobiles' assistant sales manager Darren Chua. However, Mr Chua reckons that another drastic drop in the next round of bidding is unlikely, and that COE premiums for small cars may hover around current levels.

Meanwhile, with inflation expected to be a little more tempered in the second half of this year, economists said that the MAS could have more leeway to allow the Singapore dollar to appreciate less sharply. A stronger Singapore dollar helps to moderate inflation by lowering the price of imports, but could hurt exports.

"Given the July inflation printed at a slower-than-expected pace, and we expect headline CPI to subside further to 3-3.5 per cent range in the coming months, the easing inflation dynamics will allow more policy room for some form of easing at the October monetary policy statement if the overall growth environment continues to deteriorate," said Selena Ling, head of treasury research & strategy at OCBC Bank.

HSBC Global Research chief economist (Asean) Leif Eskesen, however, pointed to other potential inflation pressures aside from accommodation and private transport, such as upside risks to global commodity prices and a tight labour market.

"This is likely to compel the MAS to maintain its current tight monetary policy stance, barring a further significant worsening of global economic and financial conditions," he said.


Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
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