SINGAPORE - Why the central bank defied the market consensus and stuck to its inflation-fighting policy stance earlier this month was made clear yesterday, when Singapore reported a worse-than-expected surge in inflation for September.
Consumer prices rose 4.7 per cent from a year ago, reversing two months of slowing price gains. Accelerating from August's inflation rate of 3.9 per cent, September's headline inflation also beat the median 4.3 per cent forecast of 17 economists polled by Bloomberg.
Core inflation, which in Singapore's case excludes accommodation and private transport costs, also rose to 2.4 per cent in September from 2.2 per cent in August. Stronger services inflation offset the slower rise in food prices.
Economists said that September's consumer price index explains the Monetary Authority of Singapore (MAS) decision on Oct 12 t o keep the trade-weighted currency on a "modest and gradual appreciation" path. A larger majority of private-sector economists had expected MAS to ease the pace of appreciation, given slowing growth and inflation.
Yesterday, MAS acknowledged in joint comments with the Ministry of Trade and Industry (MTI) that imported inflation "will be generally benign" as the global economy continues to be weak.
But they also warned that "global food prices could face further upward pressures in the next few months and into early 2013 due to weather-related supply disruptions".
"Meanwhile, persistent tightness in the labour market will support slightly stronger wage increases in 2013, which will continue to be passed through to consumer prices," the authorities said.
While the magnitude of the rise surprised the market, the fact that September's inflation would rise was no surprise. MAS and MTI flagged that as a likelihood a month ago, citing the surge in August's vehicle certificate of entitlement (COE) premiums, which feed into prices with a time lag.
Cars were indeed the main culprit of September's spike in inflation. Private road transport costs rose 10.8 per cent from last September, up from the 6.3 per cent year-on-year rise in August, recording the category's largest jump so far this year.
Fluctuations in COE premiums due to supply cuts, as well as the discontinuation of government rebates mean that the moderation in inflation - which has "taken a step down" from its 5.5 per cent average for the first half of this year - will not be smooth, Barclays economist Leong Wai Ho said.
A lower base due to the disbursement of rebates for HDB rentals and service and conservancy charges last September did contribute to accommodation cost inflation, which edged up to 7.7 per cent in September from 7.4 per cent in August.
Together, accommodation and private road transport costs accounted for two-thirds of headline inflation in September.
MAS and MTI said imputed rentals on owner-occupied accommodation and car prices will continue to keep inflation elevated through the final quarter of this year and the first quarter of the next. They also reiterated the official headline inflation forecast of "slightly above 4.5 per cent" for 2012, and 3.5-4.5 per cent in 2013.
Citi economist Kit Wei Zheng thinks higher than expected inflation probably left the MAS with little room to fine-tune policy without the risk that households' inflation expectations could become unhinged.
This matters as expectations feed into future inflation through consumers' spending and wage decisions.
MAS and MTI said core inflation is expected to be more stable and average 2.5 per cent this year, and 2-3 per cent next year. However, economists say the tight labour market will keep core inflation above the historical average of 1.7 per cent, highlighting that wage-cost pressures were a key reason why MAS kept monetary policy unchanged earlier this month.
Some pass-through of labour costs could be seen in services inflation, which rose to 3 per cent in September from August's 2.7 per cent. This was due to costs of holiday travel and household services, the latter reflecting higher costs of hiring foreign domestic helpers, said Mr Leong.
Bank of America Merrill Lynch economist Chua Hak Bin thinks the "danger of a wage-price spiral remains", noting recent announcements of pay hikes for teachers and public sector healthcare professionals.
Many sectors, such as hotels, food and beverage services and retail, appear to be suffering from manpower shortages, in part because of tightened foreign worker policies, he added.