Breaking Singapore's record streak of negative inflation: 5 key questions

Breaking Singapore's record streak of negative inflation: 5 key questions

Singapore's consumer price index (CPI) ended its longest stretch of decline last month, with one analyst calling it an "important milestone". What was behind the record streak of falling prices? And what does it mean for Singaporeans, now that inflation is out of contraction territory?

Office workers walk to the train station during evening rush hour in the financial district of Sing
Office workers walk to the train station during evening rush hour in Singapore's financial district. (File photo: Reuters/Edgar Su)

SINGAPORE: After a record 24 straight months of negative readings, consumer prices in Singapore have finally stopped falling.

Data released last Friday (Dec 23) showed the consumer price index (CPI), a measure of headline inflation, flat at zero per cent in November from a year ago.

The latest reading, which was in line with analysts' expectations as polled by Reuters, officially put an end to Singapore's longest period of negative price growth.

But what was to blame for the record streak of falling prices? Now with inflation out of contraction territory, what does that entail for consumers in Singapore? We ask the experts.

Q: What's behind the long spell of negative inflation?

For one, the dramatic fall in the price of crude oil, which holds sway over direct oil-related items such as petrol and electricity in the CPI basket and is an input to nearly all economic activity, noted CIMB Private Banking economist Song Seng Wun.

But the biggest contributors are the declines in accommodation and private transport costs, following the Government's introduction of cooling measures to the housing and motor vehicle markets. Accounting for more than one-third of headline inflation in total, cheaper certificate of entitlement (COE) premiums for cars and decreasing home rents have led consumer prices down its longest stretch of declines, Mr Song added.

While the record streak of negative inflation sounds distressing, economists told Channel NewsAsia that the situation this time round is different compared to previous bouts of price declines such as in 1975 when the CPI logged 16 consecutive months of contraction amid a global recession.

Singapore is also far from succumbing to the deflationary spiral in Japan, which has struggled to stoke inflation and encourage spending even with the Bank of Japan's (BOJ) roll-out of quantitative and qualitative easing (QQE) policies.

One piece of evidence would be the price of daily necessities, including food, healthcare and education, which have continued to rise over the past two years, pointed out Nomura economist Brian Tan.

"Large declines in the two main items - private road transport and accommodation - have dragged down the overall index by offsetting increases in other parts of the basket. That is why we have been seeing the dichotomy in headline and core inflation," said Mr Tan, referring to the core inflation measure, which excludes accommodation and private road transport costs.

Even as headline inflation contracted, core inflation remained in positive territory and in November, edged up to 1.3 per cent from October's 1.1 per cent.

Q: What is behind the uptick in inflation now?

Apart from a dissipating effect from COE prices on the CPI basket due to smaller declines, a recovery in commodity prices and expectations for improved global growth in 2017 have helped Singapore to emerge from 24 months of price declines.

"Recently, we've seen commodity and metal prices becoming more expensive. These are inputs for production and eventually will work into the final cost of goods and services here in Singapore," Mr Song said.

The veteran economist added: "To some extent, these higher prices are in anticipation of stronger demand in the coming year. There's the expectation for further stimulus from President-elect Donald Trump to 'make America great again' and the assumption that the second-biggest economy China remains on a stable footing.

"If these expectations are realised and demand starts to improve, consumer prices will be pulled along. For Singapore, which imports almost everything, these tentative signs of green shoots could push prices higher."

Q: Will this be sustainable?

According to economists who Channel NewsAsia spoke to, the answer seems to be yes.

UOB economist Francis Tan described the non-negative reading in November as an "important milestone". "It shows that we may start to experience some inflation in 2017; some inflation is good as it could signal stronger demand."

Separate data released last Friday also showed manufacturing output up 11.9 per cent from a year earlier in November, marking its fastest pace of increase since March 2014. Mr Tan said that may indicate "some uplift in global demand", which would be accompanied by "demand-pulled" inflation.

Should this scenario persist, the Singapore economy could well be on a “re-flationary” cycle. As such, the UOB economist is maintaining his forecast for headline inflation to average 0.5 per cent and core inflation to be at 1.3 per cent next year.

Similarly, Nomura's Mr Tan expects the all-items index to rise to 0.5 per cent and the core inflation measure to increase to 1.5 per cent in 2017. "This little bit of inflation will be a good thing because it tells you that the economy is chugging along well enough and there are symptoms of demand," he said.

Government forecasters are also expecting the inflation picture to be less benign in the year to come.

"MAS core inflation is expected to average around 1 per cent in 2016 before rising to 1 to 2 per cent next year. Energy-related components are projected to contribute positively to inflation in 2017, while the temporary disinflationary effects from budgetary measures will fade," the joint statement from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) dated Dec 22 said.

"However, the increase in core inflation will be gradual, given the absence of more generalised demand-induced price pressures. CPI all-items inflation has troughed and is projected to pick up to 0.5 to 1.5 per cent next year, from around -0.5 per cent in 2016, largely reflecting the rise in private road transport cost."

Q: Will this sway MAS' actions?

UOB's Mr Tan thinks the central bank is likely to adopt a "wait-and-see" approach and maintain its neutral policy stance at the next monetary policy meeting April 2017. However, if there are upside surprises in the core inflation measure, there may be "some pressure for the central bank to introduce some appreciation to the S$NEER (Singapore dollar nominal effective exchange rate) slope, especially since the US Federal Reserve looks more hawkish than ever for 2017 at their latest meeting", he said.

Analysts have largely expected a deteriorating growth outlook to force the MAS to ease at its next review in April 2017 after it kept its exchange-rate based policy unchanged in October.

Women look at vegetables at a market in Singapore inflation. (AFP/Roslan Rahman)
A wet market in Singapore. (Photo: AFP/Roslan Rahman)

A wet market in Singapore. (AFP/Roslan Rahman)

Q: What does it mean for consumers like you and me?

Even as the CPI index was stuck in disinflationary trend for the past two years, everyday expenses for the man in the street have not come down in tandem. Economists say this disparity between the headline inflation figure and what the ordinary Singaporean may feel boils down to the weightage of the items in the CPI basket.

"We have been seeing deflation in prices of goods and services that we don't consume everyday, such as COE prices. With more than 80 per cent of the population owning an HDB flat, you don't feel the impact of weaker rentals and that's why Singaporeans in general still feel that they are paying more," Mr Song said.

The pain is especially felt in expenses relating to food and healthcare services, he added. "You can complain about how your cup of 'kopi' is no longer 90 cents... That's because food inflation remains and has been rising."

Now with inflation emerging out of contraction territory, does it mean that consumers may start feeling the effect on their wallets?

"That will depend on various factors. For your daily 'kopi', prices will depend on global coffee prices, shipping costs and whether the coffee shop is paying more to hire foreign workers," Mr Song said.

One thing is for sure - while you may not see an increase in the price of your daily cup of coffee just yet, households should expect a rise in utility costs in the year ahead given the recovery in global oil prices, economists said.

Source: CNA/sk