Prices fall for 13th straight month, but core inflation still positive

WITH the November figures out, Singapore's negative inflation has now gone beyond one year, with economists predicting that inflation will remain under water in the early half of next year before starting to rise.

However, economists shrug off worries about deflation, and foresee that there will be no major impetus for the Monetary Authority of Singapore (MAS) to make any tweaks to its monetary policy.

CIMB Private Banking economist Song Seng Wun said: "Headline inflation may not revert to positive territory any time soon, but really, inflation is not a worry right now as we are more concerned about employment and business opportunities when we are looking at weak global demand."

November's headline inflation came in at -0.8 per cent year-on-year, figures released by the Department of Statistics on Wednesday showed.

This not only extends the cycle of depressed prices in Singapore for the 13th straight month, it is also one of the steepest fall in the cycle. October and August equalled this record.

The easing in prices of food and services - which has a weightage of 21.7 per cent in the headline index - offset the firmer price levels in private road transport costs, which carry an 11.5 per cent weightage, said the Ministry of Trade and Industry (MTI) and MAS in a joint statement on Wednesday.

Food inflation moderated to 1.6 per cent from 1.8 per cent in October, on account of a slower rise in the prices of non-cooked food and restaurant meals. Private road transport costs fell a modest 1.7 per cent on the back of higher oil prices as compared to a year ago. October saw a 2.3 per cent decline.

Though prices have remain depressed for over a year now, economists are not worried about deflation.

They say the inflation rate has stayed negative because of falling car prices and housing rentals, as well as lower costs of petrol and electricity tariffs.

Also, government policies have helped temper inflation. For example, overall services inflation in November edged down to 0.7 per cent from 0.8 per cent in October due to cheaper healthcare services following the introduction of MediShield Life.

Another sign of the absence of deflation is that core inflation, which excludes the costs of accommodation and private road transport, is in the positive range. It was 0.2 per cent for November, compared to 0.3 per cent in the previous month.

In addition, unemployment remains at around 2 per cent, and real median wages grew 5.4 per cent in 2015, signalling a tight labour market. "This is by no means pointing to any form of 'deflationary spiral'," wrote UOB's Global Economics and Markets Research team.

MAS and MTI reiterated on Wednesday the government's inflation projections. For the full year, it expects core inflation at 0.5 per cent and headline inflation at -0.5 per cent.

Going into 2016, economists see inflation remaining under water in the early half but will gradually pick up. They predict that consumer demand will remain tepid, but deflationary effects on prices from government policies will start to wear off, and prices will start to rise.

For 2016, the government sees core inflation coming in at 0.5 to 1.5 per cent, and overall inflation at -0.5 to 0.5 per cent.

But even so, the persistent fall in prices has had economists entertaining the idea that MAS would reach out to its Singapore dollar policy to lift prices.

Currently, year-to-date core inflation is only at 0.5 per cent, which is the lower bound of MAS' forecast for next year's core inflation, noted UOB.

Earlier, a weaker-than-expected core inflation outcome had the central bank adopting a dovish attitude in their October monetary policy decision. It only reduced slightly the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band.

Economists note that the wider global economic climate does not seem to help float prices in Singapore. Brent oil dived to its lowest price in more than 11 years on Monday, and US crude also sank to its lowest price since 2009 that same day.

"The risk is for further weakness in near-term inflation, with any rise next year not likely to head towards long-term average levels, especially if ... crude oil prices tread near 11-year lows," wrote ANZ economist Ng Weiwen. "The undershoot in inflation profile from MAS baseline forecasts might prompt a further calibration in policy easing."

But UOB sees no need for further easing as global factors start working their effect to lift inflation here.

It predicts that, in addition to the dissipation of base effects and higher food prices, the divergence in the monetary policies between the US Federal Reserve - where UOB forecasts four 25bps rate hikes - and the MAS maintaining its current stance will be sufficient "catalyst" to push the Singapore dollar to fall to S$1.46 vs the greenback by mid-2016, thus making imports more expensive here.

This article was first published on December 24, 2015.
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