Here's why Singapore inflation picked up in July

Private road transport cost increase is to blame.

According to UOB, Singapore’s July headline inflation picked up pace to 1.9% y/y, continuing the upward trend seen since inflation dropped suddenly to 1.5% y/y in April. 

Here's more from UOB:

July’s inflation rate came in slightly lower than consensus forecast of 2.1% y/y month. Core inflation, which excludes private road transport costs and accommodation, edged slightly lower to 1.6% y/y, as services inflation eased to 2.5% y/y, compared to 2.7% y/y in June.

The pickup in July’s inflation was due mainly to the on-year rise in private road transport cost (July = 2.0% y/y versus June = -2.1%) for the first time since it had contracted for the past 2 consecutive months as COE premiums contracted sharply after the MAS imposed the tighter financing measures on car loans.

Other than the upward trend in COE premiums, the implementation of a new surcharge on some cars under the Carbon Emission-based Vehicle Scheme and higher petrol pump prices also contributed to overall price increase in the private road transport segment.

Imputed rentals on owner occupied accommodation (OOA) rose at a slower pace in July (July = 2.6% versus June = 4.8%) largely due to the disbursement of the Service & Conservancy Charges rebates for HDB households. That helped to hold down inflation in this segment for the month albeit temporarily.

In their June inflation outlook report, the MAS continued to expect subdued imported inflation but cautioned that continuing tightness in the labour market may lead to cost pass-through towards higher consumer services prices. The MAS expects core inflation to rise moderately in 2H this year and average 1.5-2.5% for the full-year while headline inflation for 2013 will remain at the 2-3% forecast.

We continue to hold our view that the lagged impact from slower economic growth over the past few quarters in Singapore may further ease price pressures.

Also, we are of the view that increase in foreign worker levies in July will add significantly towards cost pressures of companies that have a higher labour input content.

Nevertheless, lagged impact will likely see cost pass-through to consumer prices coming in only later during the first half of 2014. Our forecast for headline inflation in 2013 remains at 2.6% while that for core inflation to remain at 1.7%.