Don't be fooled by inflation dipping to 4.1%
DBS warns that it’s largely base effect at work.
Here's more from DBS:
After months of uncomfortably high (above 5%) inflation, the good news is that inflation is finally going to dip. The headline number for July should print a 4.1% YoY rise, down from 5.3% in June. It’s a massive drop and policymaker may breathe a sigh of relief perhaps. But before taking out the party poppers, it pays to note that it’s largely base effect at work.
COE premiums, rentals and foreign labour cost rose sharply in the second half of last year, creating a high base, which technically will “deflate” the YoY number in the same period this year even if price level remains the same.
Underlying inflationary pressure in the economy is expected to remain high and unfortunately, the bulk of that stem from domestic sources. Non-tradable inflation, the proxy for domestic inflation has been the reason behind the elevated headline inflation.
If policy is aim at targeting inflation, growth will slower further. And growth is already slowing rapidly. The economy dipped into contraction mode in the second quarter amid the external headwinds. Ultimately, the balance of risk has tilted towards growth and there is increasingly more scope for monetary policy accommodation.