Singapore’s CPI inflation likely to turn positive towards end of 2016, may pick up over 2017

The headline consumer price index inflation of Singapore is the lowest in the region. The headline figure had turned negative in November 2014 and has remained negative for 22 straight months, the longest running. Accommodation costs and private road transport has mainly weighed on Singapore’s headline inflation. Meanwhile, core inflation began easing from mid-2014 but has never entered the negative territory. It bottomed out at 0.1 percent in May 2015 before rising slowly. It has remained stable at about 1 percent in the past four months.

If core inflation remains stable at current levels, the headline CPI inflation is likely to come out from deflation towards the end of this year and rise in 2017, noted ANZ in a research report. This is mainly on the back of increased private road transport costs.

But this is largely due to base effects as opposed to a genuine increase in prices. Accommodation costs appear set to remain a drag on the headline inflation rate until the second half of 2017, thanks to the subdued residential property and rental markets. The main drivers of core inflation imply that it is unlikely to accelerate significantly into next year.

“We forecast core inflation to increase modestly from an expected 0.8 percent in 2016 to 1.3 percent into 2017, compared to MAS expectations of a move closer to its historical average of 2 percent”, added ANZ.

The MAS policy at present is neutral. It would need a material downgrade to the inflation and growth outlook for the central bank to further ease policy, possibly via a re-centring of the policy band. At this stage, core inflation is unlikely to head lower, absent some external shock, according to ANZ. But much upside pressure on core inflation is not seen either, signifying that core inflation is expected to remain below its long term average for some time.

“This means the MAS neutral policy stance is set to be maintained for a while, and also gives room for the S$NEER to weaken further”, stated ANZ.