Singapore headline inflation likely to decline in 2016, to rise in 2017

Singapore’s headline inflation is likely to decline in 2016, deeper than previously estimated. However, consumer prices are likely to rise and average in 2017, higher than the last estimates.

Headline CPI inflation for 2016 is now expected to register -0.5 percent, down from -0.2 percent previously. Beyond that, inflation is likely to rise and stabilize at 0.9 percent in 2017, up from the previous estimate of 0.4 percent by DBS.

Firstly, inflation surprised on the downside in May 2016, with the headline number registering -1.6 percent y/y in the month. This marked the lowest inflation reading in almost 30 years.  Further, housing and utilities were down by 6.4 percent y/y due to a one-off government rebate on services and conservancy charges. The trajectory of the CPI index has been lowered to some extent due to such policy changes. And such policy effect will remain in place for the coming 12 months.

"The excess supply in housing stock and the overhanging effect from the existing property cooling measures will continue to weigh down on rental and property related costs," DBS commented in its recent research note.

However, core inflation will remain positive in the months to come. Core inflation crept up to 1.0 percent in May16, the highest since March last year. Against this background, the central bank is more likely to keep its monetary policy on hold, unless there is further downside risk to growth or core inflation.

Meanwhile, the easing in car loan regulations recently has brought about an increase in car purchases and henceforth, upward adjustments in the COE premiums. That in turn, is expected to lift the private transport CPI index given the strong influence of COE premiums on the index. Private transport CPI accounts for 11.5 percent of the overall CPI basket, contributing a significant portion but the impact will most likely be felt from June onwards, the report further added.