Chart of the Day: Is Singapore’s negative inflation a case of deflation?

It is expected to remain in the red.

There are a lot of factors to blame as Singapore’s headline inflation registers negative numbers.

According to a report by DBS, headline inflation is likely to register -0.2% YoY in Mar15, pretty much unchanged from -0.3% in the previous month.

DBS says that the main drivers of the negative inflation will continue to be housing, transport and healthcare. Such benign inflation comes on the back of low energy prices, a significantly less than expected increase in wage growth, a cooling property market, as well as moderation in healthcare costs due to the introduction of the Pioneer Generation Package.

However, it is important to note that these are either supply side factors or policy driven effects. None of these suggest that weak demand is at play and henceforth imply that this is not a case of deflation.

Here’s more from DBS:

That said, downside risk on inflation remains even if oil prices stay at the current level. Reason being the Land Transport Authority (LTA) has announced earlier this month that the COE quotas for the second quarter, covering May to July will be increased by 42%. Note private transport cost accounts for about 11.7% of the CPI basket. Decline in the COE premiums will have significant impact on headline inflation.

Yet, core inflation, which excludes private transport and accommodation costs, is expected remain in positive level. This is one of the key reasons why the Monetary Authority of Singapore (MAS) had opted to stand pat on monetary policy in the most recent review. Against market expectation, the authority kept the Sing NEER policy band at its current gradual appreciation path, without any change to its centre or width. However, output gap is modestly negative (see chart). Whether that will eventually be manifested in further decline for core inflation remains to be seen.