Services inflation set to persist despite overall moderation: Economists

SINGAPORE — Consumer prices eased further last month — hitting a new low since February — as private road transport and accommodation costs continued to slide, suggesting inflation should remain at a relatively similar pace for the rest of the year, although analysts believe services inflation stemming from a tight labour market could present some upside risks.

Against this backdrop, the Government is expected to keep its current monetary policy unchanged to act as a buffer against consumer price pressures, even while it moved last week to cut its inflation forecast for this year and the next.

Last month, the all-items Consumer Price Index (CPI) rose 0.6 per cent from a year earlier, slowing from August’s 0.9 per cent increase, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said in a statement yesterday. The rate of expansion was the slowest since February, when the CPI rose 0.4 per cent.

Private road transport costs dropped 2.8 per cent last month, while accommodation costs slipped 0.6 per cent.

Meanwhile, core inflation came in at 1.9 per cent following August’s 2.1 per cent, as services inflation slowed from 2.1 per cent to 1.7 per cent last month, the statement said.

“This was mainly due to the moderation in the increase in medical and dental fees … which reflects the impact of enhanced medical subsidies, including the Pioneer Generation Package,” the MAS and MTI said, referring to the implementation of higher subsidies for services at Specialist Outpatient Clinics and the Community Health Assist Scheme last month.

Despite the healthcare relief, core inflation — which strips out accommodation and private road transport costs and is driven primarily by services costs — is expected to remain under pressure as wages increase with the economy at full employment, the MAS and MTI added.

UOB economist Francis Tan agreed, saying: “We believe the full-year core inflation rate for both this year and 2015 will come in at 2.1 per cent — still higher than 2013’s 1.7 per cent. While not as pronounced as expected yet, the impact of wage costs on consumer prices is definitely there and will persist as restructuring continues.”

That impact was visible on food inflation, which increased from 2.9 per cent to 3 per cent last month due to a 2.8 per cent jump in costs of prepared meals. Healthcare costs still rose 1.8 per cent despite the subsidies, while education and stationary inflation stood at 3 per cent in September.

Against this backdrop, the MAS is unlikely to change its current stance of allowing a modest and gradual appreciation of the Singapore dollar, Credit Suisse analyst Michael Wan said.

“While the global economic outlook is mixed, core inflation could pick up quickly and sharply — that already happened in 2011,” he said. “I believe now the MAS would rather err on the side of caution to keep an eye on wage pressures, which are here to stay for the next two to three years.”

Agreeing, OCBC economist Selena Ling added that the MAS is also cautious of the United States Federal Reserve’s decision to normalise interest rates potentially by mid next year and will not “ease monetary policy even after revising inflation forecasts”.

In its latest policy statement last week, the MAS cut its forecast for core inflation in 2014 to 2 to 2.5 per cent from the previous 2 to 3 per cent range. The forecast for overall inflation was also lowered to 1 to 1.5 per cent, from 1.5 to 2 per cent, “amid the expected increase in the supply of Certificate of Entitlements and newly completed housing units”, the central bank said. Wong Wei Han