Why high consumer prices might not be good this year

Real purchasing power will be eroded, analysts fear.

Singapore's headline inflation registered a 0.2% YoY growth in December, ticking positively from the flat growth in the previous month.

This was seen as a spark of hope, as this instance has been the first positive reading in more than two years. The growth was mainly due to the rise of private road transport costs.

However, UOB Global Economics and Markets Research said higher consumer prices in the midst of an economic slowdown will not be good.

"[T]he real purchasing power of consumers will be eroded when nominal income remains stagnated due to poor economic prospects. However, it is currently too early to make such a conclusion," UOB said.

For this year, the MAS expects core inflation to average 1-2%, while headline inflation to average 0.5-1.5%.

"We maintain our 2017 core inflation forecast of 1.3%, while headline inflation should average 0.5% in 2017," UOB noted.

It also pointed out that higher global oil prices, as well as other commodity prices, will translate into higher inflationary pressures for this year.

Meanwhile, UOB sees MAS to adopt a wait-and-see approach and will maintain the current zero appreciation SGD NEER policy in their April 2017 meeting.

"[We] maintain our USD/SGD forecast of 1.46/USD by middle of 2017 and 1.48/USD by end 2017, due mainly to the divergence in the monetary policies between the US Federal Reserve (where we maintain our forecast of three rate hikes in June, September, and December of 2017) and the MAS," UOB said.

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