Flash Notes-Singapore: CPI Declines Again In December

Singapore Prices Continued To Fall In December On Declines In Housing & Transport costs.

    Singapore’s December consumer price index (CPI) recorded a 2nd straight month of decline, coming in at -0.2%y/y (slightimprovement from -0.3%y/y in November but above the forecast for -0.1%y/y). On a seasonally-adjusted sequential basis,December CPI decreased -0.2%m/m following the 0.3% increase in November. Core inflation (which excludes housing andprivate road transport) remained at the year-low of 1.5% in December, unchanged from November. For 2014, CPI inflationaveraged just 1%, down from 2.4% in 2013 while core inflation averaged 1.9%, up from 1.7% in 2013.

    The downside price pressure continued to predominantly come from the housing (-1.4%y/y) and transport categories, ofwhich both constitute about 41% of the CPI basket. Clothing & footwear prices were also declining (for the 4th straightmonth in December) but the clothing & footwear category is the smallest category within the CPI basket (at just 3.4%) soit negative impact on overall prices is much less.

    Food inflation remained unchanged at 2.9%y/y in December due to higher prices of regional food supplies whilecommunications costs saw the biggest jump at 1.2%y/y in December (from 0.5% in November) and education & stationaryprices increased at a faster pace of 2.8%y/y (from 2.7% in November). That said, the pace of price increases for healthcare (at1.6% in Dec, from 1.8% in Nov) and recreation (0.6% in Dec from 0.8% in Nov) continued to slow for the second consecutivemonth.

    Increasingly Concerned About Inflation Outlook.

    The Monetary Authority of Singapore maintained 2015 headline inflation forecast at 0.5-1.5%, while core inflation to average2-3% in 2015. However, the MAS rightfully warned inflation could undershoot their forecasts if the current low global oilprices are sustained. We maintain our 2015 headline inflation forecast at 0.9%, and core inflation at 1.9% but we definitelyagree there is significant risk that headline could be lower (due to prolonged negative oil price surprise) and potentiallylower COE premiums while we still view the core inflation risk to be on the upside (due to tight labour market conditions).

    Going forward, we cannot rule out a few more months of headline “deflation” largely due to oil prices at a significantlyhigh base in 1H 2014 (Brent oil prices hit a high of US$115 on 19 June 2014 before its accelerated fall by more than 50% tocurrent levels). But core inflation will remain elevated on the persistent domestic inflationary pressures imposed by the tightlabour market due to the tighter foreign workers quota & higher levies imposed. We do not expect the headline deflationto change MAS’ current policy stance “of a modest and gradual appreciation of the S$NEER policy band.” However, if we seean accelerated moderation in core inflation in next few months, then there may be a risk that the MAS may ease it policystance in the upcoming April 2015 monetary policy statement.