Inflation down for a fifth month; no deflation feared

Singapore

SINGAPORE'S consumer prices fell for a fifth straight month in March - slipping 0.3 per cent from a year ago - and economists believe that the inflation rate may turn positive only in the third quarter of this year.

If so, the economy could witness a longer stretch of negative inflation this year than the previous six-month period of falling prices from July to December 2009. But this triggered no alarm bells over deflation - typically understood as a widespread and sustained decline in prices and demand, that could harm growth.

After all, in Singapore's case, recent falls in the consumer price index (CPI) were largely due to policy-driven drops in housing rents and car prices and how these coincided with sharp declines in global oil prices.

Hence, while economists spoke of "disinflationary pressures" extending the current "deflationary streak" into the second half of 2015, they also highlighted how the authorities are now once again flagging the cost pressures stemming from Singapore's tight labour market - not mentioned in January and February's inflation reports.

The market had actually expected consumer prices to fall a slightly steeper 0.5 per cent year on year, according to a Bloomberg poll of 16 forecasters. But last month's inflation rate stood at negative 0.3 per cent, unchanged from February's.

As with previous months, housing and transport were the main drags. Accommodation costs fell 2.2 per cent in March as the housing market continued to soften, extending February's 2.1 per cent decline. Private road transport costs continued to fall too, but the hike in petrol duty rates meant a more moderate 4 per cent compared to February's 5.8 per cent drop.

The Monetary Authority of Singapore's (MAS) core inflation measure - which strips out accommodation and private transport costs - came in at one per cent, mainly reflecting lower food inflation, MAS and the Ministry of Trade and Industry (MTI) said in joint comments. This was down from 1.3 per cent in February, and lower than the 1.1 per cent core inflation market economists had been expecting.

Food prices rose at a slower pace of 2.1 per cent as demand for non-cooked food eased after the Chinese New Year. And a sharper rise in telecommunication services fees was offset by lower air fares and a smaller rise in hospitalisation charges, keeping services inflation stable at 1.5 per cent.

Reiterating their official projections that headline inflation will average -0.5 to 0.5 per cent and core inflation 0.5 to 1.5 per cent this year, MAS and MTI said that both measures of inflation "could ease further before rising towards the end of the year and into 2016, as global oil prices pick up and the effects of the enhanced medical subsidies fade".

Citi economists Kit Wei Zheng and Yap Kim Leng expect headline and core inflation to reach a trough only in the third quarter. "The 41 per cent jump in COE supply for May-July could renew downward pressure on premiums, while the decline in rentals could accelerate as more supply comes onstream," they said.

Despite more months of negative inflation ahead, HSBC economist Joseph Incalcaterra felt that MAS and MTI's joint comments on Thursday echoed the "hawkish tone" from last week's monetary policy statement, particularly with explicit mention of the cost pressures from tighter labour market conditions.

But he also agreed with the authorities' take - that weak domestic demand could limit the extent to which businesses pass costs on to consumers as higher prices.

"In fact, we forecast consumption will slow further in the coming months as variable-rate mortgages are re-set to reflect the increase in short-term rates since the start of this year," Mr Incalcaterra said.

Last week, the central bank surprised the market with its decision to keep its monetary policy stance unchanged. Most economists have said since that they expect no further change in policy in October, when the next review is due, and March's inflation report did not change that view.