Chart of the Day: What you must know about the impact of COE drop on inflation

4% forecast is at risk.

According to DBS, the drop in COE premiums will have an impact on inflation readings in the coming months. In the most recent COE bidding, COE premiums fell across the board, with the most significant drop in the Category B (>1600 cc) and the Category E (open) segments. 

While the premium for the Category A (<=1600cc) segment fell by about SGD 3.6K (-4.6%), Cat B and Cat E premiums plunged by SGD 34.6K (-37%) and SGD 26.9K (-29%) respectively.

As it is, the COE premiums for bigger engine capacity cars are now even lower than smaller cars.

Here's more from DBS:

Separately, a tiered structure for vehicle taxes (i.e. Additional Registration Fee, ARF), where more expensive cars pay higher tax rates, have also been introduced in the recent budget.

This will essentially raise the underlying cost of a motor vehicle. These higher tax rates, which will eventually be passed on to consumers, may offset the downside impact of the LTV tightening on CPI inflation.

That is, the effects on the headline CPI inflation from both policy changes will be opposing in nature. The hikes in taxes will drive private transportation cost higher whereas the fall in COE premiums will bring it down.

Private transport cost accounts for 11.66% of the entire CPI basket. Our assessment is that there could be downside surprise on the CPI inflation in the coming months as the effects of the loan curbs will likely override that of the tax hikes.

This could pose risk to our inflation forecast of 4.0% for the year.