Flash Notes-Singapore: Prices Declined For The 7th Consecutive Month

Singapore’s May consumer prices fell for the seventh consecutive month and registered -0.4% y/y (+0.5%m/m NSA), slightly higher than the 0.5% y/y (-0.6% m/m NSA) contraction in April. Market consensus hadpredicted May’s contraction accurately. This is the longest stretch of “deflation” since the last “deflationaryperiod” back in Jun-Dec 2009, when consumer prices in Singapore fell from both the lack of consumerdemand as well as corporate/business price-cutting in the aftermath of the global financial crisis.

    Although private road transport costs rose by 1.0% y/y, after contracting by 2.1% y/y in April, it was notenough to offset the larger decline in services inflation. Services inflation gained only 0.5% y/y in May, fromthe 1.1% y/y in April, as budgetary measures that include the reduction in the concessionary foreign domesticworker (FDW) levy and national examination fees waiver had kicked in since 1 May 2015.

    Accommodation costs remained soft as it fell by 2.5% y/y, a rate similar to that in April, as it continued toreflect the slower housing rental market.

    Food inflation rose at a slower 1.8% y/y clip in May, down from a 2.1% y/y rise in April. This was due to theslower increase in non-cooked food prices that had more than offset the sharper price increases forrestaurant meals.

    The MAS core inflation (which excludes housing and private road transport) fell to a low of 0.1% y/y in May,from 0.4% y/y in April, as it reflected mainly the impact from the budgetary measures on services costs as wellas more benign food inflation. At slightly more than 20% of the entire consumption basket, significantslowdown in food inflation will likely impact core inflation to a bigger extent.

    One of the reasons for slower food inflation could be due to the recent strength in the SGD against the MYR,giving a boost to the purchasing power of food wholesalers in Singapore. That may translate into lowerwholesale prices for several food categories (particularly fruits & vegetables). In fact, we think that in nextmonth’s CPI report, we may see even lower food inflation. As a note, since hitting a recent low on 26 May2015 (SGDMYR = 2.6916), the SGD had gained 4.0% against the MYR in quick-step succession and is currentlyat 2.80 at writing.

    In their report today, the MAS maintained their 2015 headline and core inflation forecast of -0.5% to 0.5% and0.5% to 1.5% respectively, as car prices and accommodation costs will continue to dampen inflationarypressures, while global oil prices will likely be much lower in 2015 compared to the average US$93/barrel in2014.

    We maintain our 2015 headline and core inflation forecast of 0.3% y/y and 1.2% y/y respectively. Goingforward, we may continue to see negative headline inflation. Other than the still-soft prices in the cars andhousing segment, the slew of budgetary measures will continue to dampen prices in other segments of theconsumer basket such as education (waiver of national examination fees), healthcare (subsidies for PioneerGeneration), and household services (FDW levies).

    However, we will like to note that downward pressure on both headline and core inflation over the pastseven months was due mainly to administrative measures from the government. This was different from thedrivers of deflation in the past where falling prices were due to contraction in aggregate demand andunemployment rate spiked. As such, our opinion remains that the MAS will likely maintain their currentmonetary stance of a “modest and gradual appreciation” of the SGD NEER unchanged at our estimated 1.0%pa rate in the next policy meeting in October, and there should be no pressure in further easing of theappreciation rate.