S'pore CPI set to ratchet up further: economists
After August's 2% rise, new rules on foreign labour, COEs could push up prices
BY KELLY TAY [email protected]

[SINGAPORE] New policy measures unveiled this month - with stricter rules for hiring skilled foreigners and tweaks to certificate of entitlement (COE) categories - will push consumer prices higher in coming months, economists say.

This, even as the consumer price index (CPI) in August rose 2 per cent from a year ago, picking up from July's increase of 1.9 per cent and in line with economists' expectations of 2 per cent in a Reuters poll.

According to a joint statement issued yesterday by the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI), this slight rise was a result of stronger increases in the costs of accommodation, food and services - though these were partly offset by a smaller gain in private road transport costs.

Climbing at a faster pace was the MAS core inflation measure, which excludes costs of accommodation and private road transport. This rose to 1.8 per cent in August from 1.6 per cent in July, due to higher contributions from food and services.

Food prices increased 2.4 per cent last month, up from 2.1 per cent in July, mainly due to costlier hawker and restaurant meals. Services inflation picked up to 2.7 per cent in August from 2.5 per cent a month earlier, driven by a stronger rise in cable TV charges and tertiary education fees.

Economists from ANZ, Barclays and DBS noted that these core inflation trends showed renewed signs of cost pass-through to consumers.

Said DBS's Irvin Seah: "This has reaffirmed my view that underlying cost pressures within the economy remain high, mainly because the labour market is tight, and costs are still rising. All these price pressures are eventually passed on to the consumer... We can already see inflation rising steadily, and I expect it to spike up to above 4 per cent in April next year."

The government's new and tighter restrictions on skilled foreign workers - announced by the Ministry of Manpower yesterday morning - will "add upside risks to core inflation", said ANZ economist Daniel Wilson.

Barclays's Joey Chew noted: "The sharp month-on-month pick up in prices of some services is a timely reminder that there are considerable cost pressures in the economy and producers are only waiting for the right moment to pass them on, for example when growth conditions improve."

Accommodation costs rose 4.2 per cent in August from 2.6 per cent in July, when there was a disbursement of Service & Conservancy Charges (S&CC) rebates for HDB households.

Private road transport, in contrast, edged up 0.1 per cent in August after increasing by 2 per cent in the previous month.

"Car prices fell, reversing the rise in July, while petrol pump prices rose at a more moderate pace in line with the recent trend in global oil prices," said MAS and MTI.

But economists from at least seven banks cautioned that the jump in COE premiums seen at the latest September auction could continue in the coming months, which would push headline inflation northwards.

Two weeks ago, the government unveiled its revised COE framework (effective February next year), where cars belonging to Category A must not have more than 130bhp of engine power, on top of an existing rule that caps engine displacement at 1,600cc.

"(This spike in COE prices was) likely due to market players anticipating COE policy changes, with some pre-emptive demand seen," noted OCBC's Selina Ling.

Francis Tan of UOB added: "Together with the appealing discounts given by car dealers to reduce their inventories as another 'carrot' for attracting new car buyers, this renewed wave of buying may prompt COE prices to go on an upward trend.

"So the unintended consequence of the LTA's (Land Transport Authority's) COE category revision is that in the near term, people will be rushing to purchase cars, because they think that prices in the future will rise," said Mr Tan.

Some economists predict that private transport inflation will tick up in coming months, lifting headline inflation to the upper bounds of MAS and MTI's inflation forecast range of 2-3 per cent.

But the 3 per cent threshold is unlikely to be breached, according to Mizuho economist Vishnu Varathan: "Current COE prices will have to be significantly higher and rise much faster to create an adverse inflation impact ... (It's) not very likely (that inflation contribution from COE prices) will re-emerge to threaten the inflation target."

http://www.businesstimes.com.sg/prem...mists-20130924