Average inflation in 2012 to exceed MAS’ 4.5% forecast: Nomura

But the research firm sees the risks as more balanced rather than tilted to the upside.

According to Nomura, headline inflation is also moderating more sharply. CPI inflation eased to 5.0% in May from 5.4% in April, driven by accommodation costs.

Here’s more from Nomura:

While we think it is possible for CPI to stay above 5% in June, we believe that the path in H2 is likely to be lower. Underlying inflation was stable at 2.7% in May, but the decline in the import price index points to underlying inflation approaching 2.0% in the near term.

The risk to this view is that the labour market remains tight but as the MAS noted, the pass-through from wage costs to consumer prices is going to be at a “more moderate pace than that seen early this year.” Finally, the private road transport component still had a higher contribution to CPI (at 1.2 percentage point from 1.0 in April), but this is likely to ease in response to new measures which allow slightly faster growth of certificate of entitlements by August.

We continue to forecast 2012 average inflation to exceed the MAS’s 3.5-4.5% forecast range but see the risks as now more balanced rather than tilted to the upside. But in terms of underlying inflation, we also expect that it will fall within the MAS’s 2.5-3% forecast. Given the emphasis of the latter as a key policy parameter, we think this provides the MAS more policy flexibility to be able to shift to a more neutral stance if external risks intensify at the next policy announcement in October.

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