Inflation eases to 6-month low as property and car prices drop

THE tepid property market and declining car prices kept a lid on price rises in August.

Inflation eased to a six-month low of 0.9 per cent last month, down from 1.2 per cent in July.

Despite the low headline inflation number, economists say the Monetary Authority of Singapore (MAS) will not ease up on its stance of allowing a "modest and gradual" appreciation of the Singapore dollar at its meeting next month to set exchange rate policy.

This is because core inflation, which excludes the cost of accommodation and private road transport, remains elevated on the back of domestic cost pressures, particularly from the tight labour market. The core inflation figure released by the MAS is seen as a better gauge of out-of-pocket cash expenses for most households.

It inched down slightly to 2.1 per cent last month, from July's 2.2 per cent.

The exchange rate is the Government's main tool to combat inflation: A stronger currency means imports cost less in Singdollar terms.

The Singdollar is managed against a basket of currencies of Singapore's major trading partners.

The MAS will release a policy statement next month which will set the tone for how the currency will perform for the next six months.

Given that official forecasts tip core inflation to remain "elevated" at between 2 per cent and 3 per cent this year, it is unlikely MAS will let go of the reins when it comes to its Singdollar policy stance, said Citi economist Kit Wei Zheng.

He added that economic growth is also expected to pick up in this quarter, which "should allay concerns over the growth outlook for now".

Last month's benign inflation figure was due mainly to a decline in the cost of private road transport, which includes car prices.

Private road transport costs fell 2.9 per cent last month over the same month last year, largely due to lower certificate of entitlement (COE) premiums. This extended July's 1.6 per cent fall.

Prices at the petrol pump also rose at a slower pace of 0.7 per cent compared with 3.1 per cent a month ago, on account of the recent weakness in global oil prices.

Overall food inflation was slightly lower at 2.9 per cent compared with 3 per cent a month ago. Non-cooked food prices, however, rose at a quicker pace of 3.4 per cent from 2.8 per cent in July, reflecting costlier seafood and vegetables.

Accommodation costs dipped 0.2 per cent - entering negative territory for the first time since June 2010 - due to a soft rental market. Inflation in this category is in its ninth consecutive month of decline amid continued weakness in the property market, said Barclays economist Leong Wai Ho.

As COE prices have also stabilised, the recent trend of benign - if not weak - headline inflation alongside higher core inflation is "likely to persist for the remainder of the year", he added.

Overall inflation is expected to "remain subdued" over the rest of the year due to continued drag from the faltering property market and car prices, the MAS and Ministry of Trade and Industry said yesterday in a joint statement.

Inflation is expected to come in at between 1.5 per cent and 2 per cent for the full year, according to official forecasts. chiaym@sph.com.sg

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