COE premiums’ dissipating low base effect drives easing inflation

Transport CPI inflation moderated sharply from 10% to 3.5%.

According to DBS, CPI inflation for Jan12 announced yesterday eased to 4.8% YoY, from 5.5%
in previous month.

Here’s more from DBS:

The drop in the headline number can be attributed to the dissipating low base effect arising from the COE premiums. That largely accounts for the sharp moderation in transport CPI inflation to 3.5%, from 10% previously. But note that COE premiums are still rising and will probably remain so given that the authority wants to keep vehicle population growth rate at no more than 0.5% per annum going forward.

There are upside risk to inflation despite a slower growth momentum. Rising political tension in Middle-east leading to higher oil prices may pose a threat to inflation. Strong domestic inflationary pressure arising from higher rental and escalating labour cost will also continue to keep inflation elevated.

Even core inflation has risen to 3.5% in the month, from 2.6% in Dec11. This is the highest in three years and it clearly reflects a buildup in underlying cost pressure. This will limit the central bank’s ability to loosen the exchange rate policy despite the looming global uncertainties. As such, the MAS is expected to maintain its current policy stance of a gradual appreciation in the Sing NEER.

Importantly, domestic supply side pressure is currently the key driver of inflation in Singapore. The worry is that it will probably remain so going forward given that the tightening in the foreign labour policy is causing a persistent increase in labour cost. So, although full year inflation is still expected to average 3%, upside risk remains.