Why some analysts believe the surprise jump in September's core inflation will be short lived

Check out what is MAS likely to make of all this.

September headline CPI declined 0.6% y-o-y. On a month-on-month non-seasonally adjusted basis, CPI was unchanged.

MAS-style core inflation, which excludes accommodation and private transport, rose 0.6% y-o-y.

On a component basis for headline CPI, accommodation costs fell 0.3% m-o-m nsa as rental prices continue to fall alongside softer property prices. Private road transport costs declined 0.5% m-o-m due to slightly lower Certificate of Entitlement premiums, a moderation compared to the 2.2% decline in the previous month.

Core CPI rose due to higher public transport, retail, and recreation costs, partly a reversal of discounts in August. Moreover, the low base effect from Pioneer Generation healthcare subsidies dissipated, lifting the y-o-y reading.

Here's what analysts had to say about the newly released data:

Joseph Incalcaterra, Economist, HSBC

Singapore's core CPI readings have shown a great deal of volatility recently as commodity price fluctuations, government subsidies, and broad disinflationary pressures all interact. September's core print was higher than all economist estimates, thanks to a pick-up in broad services and retail inflation, the dissipation of Pioneer Generation healthcare subsidies, and the reversal of public transport discounts from August.

That said, this six-month high in core CPI will likely prove ephemeral. Singapore's electricity tariffs were reduced an average of 9.3% on 1 October (Singapore's electricity tariffs are recalibrated on a 3-month basis and are derived from natural gas prices in the previous quarter), which should bring core CPI back to the range of 0.2-0.3% y-o-y. However, moving into 2016, base effects and sequential healthcare inflation will result in higher core prices, which we forecast will end the year at 1.8% (near the long-term average).

As for headline CPI, we see the deflationary readings continuing over the short term. The headline measure continues to be dragged down by deflating property prices and lower Certificate of Entitlement (COE) premiums for vehicles.

Concerning the former, we expect housing prices to continue moderating well into next year. MAS Managing Director Ravi Menon made clear that the central bank is in no rush to dismantle the various macro-prudential tools used to stunt housing price growth and curb household debt. Moreover, house prices may drop further once the Fed starts lifting rates, which HSBC expects will occur in December. We reckon it could take a further 10% decline in property prices before any reversal of policy is considered. As for private transport prices, increased COE supply throughout next year should result in steadily lower premiums. These two factors may keep the headline CPI reading negative through 1H16, after which the gauge may turn positive on a more sustained basis.

What is MAS likely to make of all this? In this month's bi-annual monetary policy statement, the MAS adopted a slightly less hawkish view on inflation and dropped references to "tight labour markets." As we highlighted in our reaction (see: MAS monetary policy statement: Still tapping the brakes), this downgrade in language lowers the bar for future easing should growth deteriorate further - i.e, the MAS will be less constrained by its core inflation outlook.

That said, the MAS did not entirely dismantle its view for higher core CPI. In fact, it re-iterated expectations that core will move back to its historical average by end-2016. Accordingly, we expect monetary settings to remain on hold through next year barring a significant downturn in GDP (i.e. full year growth tracking well below 2.0% in 2016)

Suhaimi B Ilias, analysts KimENg

Our 2015 inflation forecast is unchanged at -0.5%-0.0%, to reflect prevailing subdued outlook on “Transport” cost given low global crude oil prices, the continued depressed “Housing & Utilities” costs and stable-to-soft global commodity prices which should offset the labour cost impact of the tight job market

Continued deflation in “Housing & Utilities”
“Housing & Utilities” fell by -3.6% YoY in Sep 2015 (Aug 2015: -3.6% YoY) caused by continued low rental cost and imputed rentals on owneroccupied accommodation on the back of a softening housing rental market. As a result, the “Accommodation” sub-component of “Housing & Utilities” dropped by -2.9% YoY in Sep 2015 (Aug 2015: -2.9% YoY).

However, declines in the sub-category of “Fuel and Utilities” (Sep 2015: - 8.5% YoY; Aug 2015: -8.4% YoY) were lower in YoY terms after the -12.3% YoY recorded in 2Q 2015 attributed to tariff increase by an average +7.5% in 3Q 2015 on higher cost of natural gas for electricity generation.

Downward pressure on residential property prices and rentals to keep headline inflation low, on incoming supply of newly completed housing units and industrial space. This is in addition to the reduction in property tax and other cost cuts for owners of HDB flats. The government’s measures on residential property since 2009 have been putting downward pressure on property prices. These include a cap on debt repayment costs at 60% of a borrower’s monthly income and higher stamp duties on home purchases to curb excessive increases in property prices. In 3Q 2015, the private residential property price index dropped further to -4.2% YoY (2Q 2015: -3.7% YoY) while the rental index declined by -4.3% YoY (2Q 2015: - 4.4% YoY).

“Transport” cost fell by -2.2% YoY (Aug 2015: -2.3% YoY), as its biggest component i.e. “Private Road Transport” cost declined by -3.2% YoY (Aug 2015: -2.9% YoY). On monthly changes, the “Private Road Transport” fell marginally by -0.5% MoM (Aug 2015: -2.2% MoM). The cost of “Public Road Transport” nevertheless rose +2.2% YoY (Aug 2015: +0.6% YoY), as bus and train fare discounts offered by public transport operators in conjunction with the SG50 National Day celebration, ended.

Recent results from COE bidding in Oct 2015 showed prices marginally declined from the previous month to SGD56,001 for Category A COEs (previously at SGD57,089), which is down sharply compared to a yearearlier (Oct 2015: -12.3% YoY; Sep 2015: -12.0% YoY). The number of vehicles de-registered was sustained above the medium term average at 9,103 in Sep 2015 (Aug 2015: 8,358) with YTD 2015 average at 7,937 vehicles per month (2014: 4,810 vehicles per month). Accordingly, new car registration in Sep 2015 rose to 5,260 (Aug 2015: 4,700), pushing the average monthly new car registration for Jan-Sep 2015 period higher to 4,326 (2014: 2,411).

The MAS surprised the market in its Oct 2015 meeting by reducing slightly the slope of the policy band for the second time this year. No change to the width of the policy band and the level at which it is centred. At the same time, the ‘modest and gradual appreciation’ path of SGD NEER policy band was maintained. This mild easing does suggest that MAS has a slightly more positive economic trajectory but concerned about inflation in 2016 as a significant easing could lead to further inflationary pressures in 2016.