S'pore’s inflation at 4-year low in Feb as private transport costs drop

Singapore's consumer price index (CPI) rose by 0.4 per cent in February from a year ago.

Economists said the deceleration is due to the high base for private road transport costs and food prices in 2013, and they expect inflation to pick up in the following months as rising wage pressures set in.

The 0.4 per cent rise in February's CPI was the slowest since January 2010 when price levels increased by 0.2 per cent year-on-year.

It rose by a slower-than-expected 0.4 per cent on-year, down from the 1.4 per cent year-on-year inflation seen in January.

Economists polled by Bloomberg had expected February’s inflation to come in around 0.8 per cent.

The slow pace was largely attributed to private road transport costs, plunging 7.1 per cent on-year in February, after decreasing by 3.5 per cent in January.

Compared to January, food prices fell 0.2 per cent as the cost of some items was lower after the Lunar New Year period.

Accommodation costs in February increased by 2.0 per cent, lower than the 2.4 per cent rise in January, while service fees rose at a slower pace of 2.1 per cent compared to 2.9 per cent the month before.

Economists said the relatively low headline inflation was driven by the record-high car premiums last year, but this is unlikely to persist.

Alvin Liew, senior economist at United Overseas Bank, said: "Last year, January and February were the periods where we saw COE (Certificate of Entitlement) at multi-year record highs. With that itself, that's the reason why you see the number very depressed in February.

“If you look forward, for the next few months, the COE prices, if you look at it last year, it was likely to be lower because there were measures coming in at the tail-end of February 2013 -- financing restrictions on car purchases -- and I think that effect on the car prices should be more muted for the next few months."

Economists also said the low CPI growth is transient.

Core inflation, which excludes accommodation and private road transport, rose by 1.6 per cent in February from a year ago.

And going forward, domestic cost pressures are expected to be a key inflationary risk amid a tight labour market.

Vishnu Varathan, senior economist at Mizuho Bank, said: "The MAS (Monetary Authority of Singapore) actually is not opposed to wages rising, but the main concern from a policy standpoint is if wages rise too fast, far overtaking or outstripping productivity gains, then the competitiveness of Singapore would be eroded.

“That leaves a lot more of a lasting damage on the economy than, arguably, would some Sing dollar appreciation that just cuts into pricing competitiveness. From this point of view, the MAS wants to get inflation expectations anchored, as they reassure citizens we're going to have fairly low inflation, and that's going to lead to a lot more sustainable medium term growth."

Meanwhile, economists also warned that rising crop prices due to adverse weather may lead to higher food inflation in the next three months.

Mr Vishnu said: "We see a bit of food inflation coming through. We've seen that due to geopolitical reasons as well as adverse weather conditions, we've seen sugar prices rising, cocoa prices, coffee prices soaring. Arguably not all grain prices are in super-inflationary territory, certainly they're below post-Lehman peaks in 2011. If these price rises are sustained, we could see some food inflation coming through."

Taking these into account, the government forecasts that core inflation will rise over the next few quarters and average 2 to 3 per cent this year.

Economists do not expect the central bank to alter its monetary policy stance of a gradual moderate appreciation of the Singapore dollar.