Analyst warns against a spike in headline inflation next year

As COE base effect lapses.

According to DBS, CPI inflation for September came in lower than expected. The headline number printed 1.6% YoY against the consensus expectation of 2.0%. While inflation has surprised on the downside in the month, it doesn’t mean that we can afford to be complacent about inflation risk going forward.

Here's more from DBS:

Decline in transport cost is the key driver for the lower inflation and this is largely policy driven. Apart from the corrections in the COE premiums due to the tightening in car loans by the Monetary Authority of Singapore (MAS), the policy to introduce free MRT rides has probably helped to lower overall transport costs in recent months. But such policy changes will only have transient effects on inflation, which will not last for more than 12 months due to lapsing of their associated base effects.

As it is, COE premiums are already approaching pre-tightening levels. The base effect will lapse from October onwards, which spells higher transport inflation ahead.

Beyond the COE effect, the tightening in foreign labour policy will only continue to drive labour cost higher, particularly when the domestic labour market is already so tight.

In addition, occupancy rate for various categories of commercial properties are all above 90%, which makes for further increase in rental and consequently, business costs which will eventually get passed on to consumers.

With the underlying cost pressure in the domestic economy still high, expect a spike in headline inflation when the base effects from transport related policy changes lapse next year.

We continue to maintain the view that inflation will cross the 3% mark in the coming months and could potentially test the 4% level by middle of next year.