Why analysts think that Singapore's 'inflation bliss' is just a blip

Inflation hit 1.5% in December.

According to DBS, December CPI inflation came in lower than expected. Headline inflation registered 1.5% YoY, lower than the consensus expectation of 2.0%.

The story behind the moderation in inflation is the 2.1% decline in transport CPI inflation. And that most likely came on the back of the lower COE premiums in the month compared to the same period in 2012. Average COE premium in Dec13 is about 17% lower than the level 12 months earlier.

Here's more from DBS:

That said, the current “inflation bliss” will be short lived. Domestic inflationary pressure remains high. Rental and labour cost are still driving overall business cost higher. As long as business conditions remain buoyant and the labour market stays tight, the associated cost will get passed on to consumers.

Moreover, the COE premiums are climbing higher again. And it’ll probably get worse with average monthly COE quota likely to fall further by about 12.3% between Feb-Apr14, compared to the period Aug13-Jan14. This makes for further increase in premiums, which is currently hanging around the SGD 70-80K range (exclude motorcycle). As policymakers are determined to reduce the traffic congestion problem and to encourage the commuters to switch to public transport, high COE premiums are here to stay for a long while unless demand moderates somehow.

And the pass-through effect on inflation will imply significantly higher inflation in the coming months. Our assessment is that inflation will rise sharply from April onwards when the base effect from the earlier car loan curb wears off (see Chart). We maintain the view that inflation will zoom pass the 3% mark and approach the 4% level in April. Full year inflation will average 3.0% compared to 2.4% in 2013.

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