IN spite of the recent pick-up in global oil prices, the government yesterday said it believes external price developments "should be relatively benign" for the rest of this year, and that domestic cost pressures - particularly those stemming from a tight labour market - are likely to remain the primary source of inflation here.
Monday's joint comments from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) came as global oil prices rose some 5 per cent in the past two weeks, because of the ongoing turmoil in Iraq. There, Sunni militants led by the Islamic State of Iraq and Syria (known as ISIS) have captured several cities in the northern and central regions and are continuing to seize control of border crossings to Jordan.
With the heightened uncertainty over whether an oil price shock will come to pass, economists say Singapore's central bank will remain vigilant about inflation risks from overseas and at home, and will keep the Singapore dollar on an appreciating path.
Consumer price inflation in May picked up a little more than expected to 2.7 per cent (from 2.5 per cent the month before), "due to base effects associated with the fluctuations in car prices".
Certificate of Entitlement (COE) premiums fell sharply in March and April last year, following the implementation of financing restrictions on motor vehicle loans. As a result, private road transport costs climbed by 8.1 per cent year-on-year last month, stronger than the 5.7 per cent rise in April. Petrol pump prices also edged up at a faster pace in May. The median forecast of 21 economists polled by Bloomberg (before the Department of Statistics released the data yesterday) was for a marginally lower 2.6 per cent year-on-year rise in the consumer price index (CPI).
Apart from private road transport costs, price increases for all other major categories moderated slightly during the month.
Accommodation costs rose by 0.9 per cent in May versus 1.1 per cent in the preceding month, due to a slower pace of increase in imputed rentals on owner- occupied accommodation.
The government and private-sector economists expect the latter to stabilise this year, given the large supply of newly completed housing units.
With May's broad-based easing in prices, MAS core inflation - which excludes accommodation and private road transport costs - moderated to 2.2 per cent from April's 2.3 per cent.
Nevertheless, ANZ, Bank of America Merrill Lynch, Barclays, CIMB and UOB economists were keen to stress that a gradual uptrend in core inflation remains the baseline forecast.
UOB economist Francis Tan told BT: "May's figure doesn't change the fact that there is still pressure for core inflation to go higher. It may have gone down a bit this time around, but there's still an upward trend."
Last month's moderation in core inflation was due to lower contributions from food items and services.
Food inflation came in slightly lower at 3 per cent in May compared with 3.1 per cent in the previous month, reflecting a smaller increase in non-cooked food prices.
Services inflation edged down to 2.5 per cent from 2.7 per cent in April, as holiday travel costs and health insurance premiums rose more moderately.
But Barclays and CIMB economists believe the reprieve will be short-lived.
Said CIMB economist Song Seng Wun: "Services inflation is going to go up as a result of domestic cost pressures - and firms are likely to pass these on to consumers."
MAS and MTI reiterated that core inflation is projected to "stay elevated" at 2-3 per cent in 2014, while headline inflation is expected to come in at 1.5-2.5 per cent.
While economists do not anticipate a change in MAS's monetary policy stance, Kit Wei Zheng from Citi said in a research note: "But should growth expectations persistently disappoint, we would watch for potential knock-on effects on the jobs market and core inflation as a signpost for any shift in policy bias."
Get The Business Times for more stories.