MAS raises headline inflation forecast to 4-4.5%

Singapore's central bank narrowed its forecast range from 3.5-4.5% but assuages fears by saying core inflation is bound to ease.

Headline inflation or CPI-All Items inflation will remain elevated due to housing rentals and COE premiums. Meanwhile,The MAS forecast for core inflation remains unchanged at 2.5-3.0%. Core inflation is likely to ease further from 2.7% in second quarter to 2% by the end of the year. .

The updated inflation forecasts were announced by MAS managing director Ravi Menon at the MAS annual report press conference held yesterday.

On explaining the continued elevation in headline inflation, Mr. Menon said: "Imputed rentals on owner-occupied homes are expected to remain high compared to a year ago. This essentially does not involve an actual increase in spending by households. Imputed rentals on owner-occupied homes are based on actual rentals but, as you know, only a small segment of the population rents their homes. We expect continued tightness in the housing rental market, especially in the HDB segment. While measures have been taken to increase housing supply, it will take some time for this supply to come onstream," he said.

"Should demand remain resilient, COE premiums are likely to stay high. This could present upside risks to the 4.0-4.5% forecast for CPI-All Items inflation. In sum, the costs of imputed rentals on owner-occupied homes and private road transport will account for about 60% of CPI-All Items inflation this year," he added, with monthly volatility expected due to fluctuations in COE premiums and the base effects associated with the timing of the government’s disbursement of service & conservancy charges and rental rebates.

But Mr. Menon said more focus should be given to core inflation, which will ease further in the second half of the year. 

"The figure we watch most closely is Core Inflation, which excludes the costs of accommodation and private road transport. We were concerned when Core Inflation came in at 3.1% in the first quarter of this year. This reflected high commodity prices and the pass-through of strong wage growth in 2011. In the second quarter, Core Inflation moderated to 2.7%. It is likely to ease further and approach 2% by the end of the year. This is not far from the historical average of 1.7%," Mr. Menon said.

The central bank managing director said lower prevailing oil and food prices, as well as strong pass-through of wage costs, are driving the moderation in core inflation.

"Global oil prices were at US$103 per barrel in the first quarter of the year. They are now around US$90. For the rest of the year, they should remain in the US$90-95 range on average, barring deterioration in the geo-political situation in Middle East. The easing of global oil prices is already passing through to prices of domestic oil-related items. Let me give a couple of examples. Electricity tariffs for households came down by 2.5% in July, the first reduction this year. Likewise, petrol pump prices have fallen for three consecutive months, by a cumulative 9% from March. Going into the second half of the year, domestic oil-related prices are expected to keep largely stable," Mr. Menon said.

"Second, food prices. Global food commodity prices, as measured by the UN FAO Food Price Index, were 5.4% lower in June compared to beginning of the year. This has started to feed through to domestic food inflation, which came down from 3.8% y-o-y in January to 2.3% in June. Recently, there has been spike in global corn and soya bean prices due to a drought in US. But we do not expect a broad-based surge in global food prices in coming months, and so domestic food inflation should remain relatively contained for rest of year," he added.

"Third, domestic wages. The 6% increase in domestic wages last year passed through quite strongly into a variety of services costs earlier this year. We can expect some continued pass-through of wage costs for the rest of this year, but at a more restrained pace compared to early this year," he said further.