Housing and transport costs keep inflation in negative territory

Amid a significantly less than expected increase in wage growth.

Fears of a recession are looming, but analysts at DBS think Singaporeans should calm down because the risk is still low at this juncture.

Feb15 inflation registered -0.3% YoY. This is much in line with DBS’s earlier forecast of -0.2% and this is also the fourth consecutive month of negative inflation. The main drivers of the negative inflation have once again been housing (-2.6%), transport (-3.7%) and healthcare (0.2%) costs. While some will surely raise the concern of deflation in Singapore, DBS maintains that there is absolutely zero risk on that.
According to DBS, 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. 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.
Moreover, growth may be slow and below potential (2.9% in 2014 versus 4.0% middle term potential growth rate), risk of a recession is still low at this juncture.

Here’s more from DBS:

The labour market is still tight with unemployment rate at 1.9% as of end 2014.

Typically an unemployment rate of 2.0% will indicate that the economy is at full employment level.
Yet, inflation dynamics definitely have changed. And that implies that there is more room for further monetary accommodation. The Monetary Authority of Singapore (MAS) surprised the market on 28 Jan15 with an announcement to flatten the slope of its appreciating Singapore dollar nominal effective exchange rate (SGD NEER) policy band. The decision was made in conjuncture to a downward revision in its inflation forecasts. If inflation continues to remain stuck in negative level or growth turns out weaker than expected, the MAS could well re-centre the policy band lower in the forthcoming April review.

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