Deflation in Singapore in November 2014 - First time in five years

Singapore gets its first taste of deflation in five years
Cheaper oil and COE premiums see prices dip, but demand still healthy
By Chia Yan Min, The Straits Times, 24 Dec 2014

THE relatively rare phenomenon of negative inflation hit Singapore last month - its first appearance in five years.

The effect - also known as deflation - occurs when prices in one month decline over the same period a year earlier.

In this case, consumer prices fell 0.3 per cent last month over November 2013, mainly due to fluctuations in certificate of entitlement (COE) premiums and cheaper crude oil.

The last negative inflation recording was in December 2009 amid the global financial crisis. Plunging oil prices may make headline inflation more common.

Benchmark Brent crude has dropped from about US$70 a barrel at the end of last month to US$60 now, so even deeper deflation may occur this month.

Deflation has become a grave concern for economies around the world. Apart from higher supply, the drop in crude oil prices is a also the product of slowing growth.

The gloomy outlook could translate to even less economic momentum as consumers and businesses grow more cautious.

While deflation points to deeper structural issues for economies like Japan and Europe, economists say that Singapore has less to worry about as its economy is not suffering from a chronic lack of demand.

Singapore's deflationary reading last month was driven by fluctuating COE prices and falling accommodation costs, in addition to cheaper crude.

"Lower prices were a result of administrative measures designed to curb excess consumer leverage in the purchase of houses and cars, and not due to a lack of demand," said UOB economist Francis Tan.

Private road transport costs fell 7 per cent in November over the same month last year, while accommodation costs declined 1.2 per cent amid a softening rental market.

However, food inflation jumped 2.9 per cent, driven by price increases in non-cooked items and prepared meals.

Domestic food inflation could remain elevated in the near term, said the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) in a joint statement yesterday.

They reiterated that firms, particularly those in the service sector, are likely to continue passing on high wage costs to consumers amid the tight labour market.

This was borne out in last month's core inflation figure - seen as a better measure of everyday out-of-pocket costs - which came in at 1.5 per cent.

The measure, which excludes the costs of accommodation and private road transport, is expected to average 2 per cent to 2.5 per cent this year. This is higher than the 1 per cent to 1.5 per cent forecast for headline inflation.

Dr Tan Khay Boon, senior lecturer at SIM Global Education, said car owners who enjoy a lower petrol bill "are the only beneficiaries of lower oil prices".

"In the midst of high labour costs as well as high industrial and commercial rental costs, any cost savings from lower oil prices will likely be used to defray the high unit labour cost and other operating costs, instead of being translated into lower prices for consumer goods and services."

The MAS and MTI reiterated their forecasts for headline inflation as coming in at between 0.5 per cent and 1.5 per cent next year, but cautioned yesterday that the reading could come in slightly lower "should global oil prices be sustained at current low levels".

Core inflation is likely to "stay firm" and average 2 per cent to 3 per cent next year, according to official forecasts.

Singapore experiences deflation for first time in 5 years
Channel NewsAsia, 23 Dec 2014

For the first time in five years, Singapore is experiencing deflation as the consumer price index (CPI) went into negative territory, the first negative reading since December 2009.

The CPI fell to -0.3 per cent year-on-year in November, down from 0.1 per cent in October, said the Department of Statistics on Tuesday (Dec 23).

Private road transport cost decreased by 7.0 per cent, after the 5.6 per cent decline in October, largely due to the high base of car prices a year ago. Petrol pump prices also fell at a faster pace of 4.3 per cent compared to a decline of 1.6 per cent in October, the Ministry of Trade and Industry (MTI) and Monetary Authority of Singapore (MAS) said in a joint news release.

Pump prices eased by 4.3 per cent, and together with falling car prices, they led to a 7 per cent decline in private road transport costs.

Accommodation cost fell 1.2 per cent, extending the 1.0 per cent correction in the previous month - a result of the soft housing rental market.

Food inflation rose to 2.9 per cent from 2.8 per cent in October, mainly due to price increases for non-cooked food items and prepared meals.

Services inflation moderated to 1.4 per cent from 1.7 per cent in the preceding month, as holiday travel cost fell and a smaller increase in household services cost and medical treatment fees.

Core inflation – which excludes changes in the price of private road transport and accommodation – fell to 1.5 per cent year-on-year in November, down from 1.7 per cent the previous month. This was largely due to the smaller increase in services fees.

Consequently, core inflation is likely to stay firm and is expected to average 2 to 2.5 per cent this year and 2 to 3 per cent next year, while CPI-All Items inflation is expected to come in at 1 to 1.5 per cent this year and 0.5 to 1.5 per cent in 2015.

DEFLATION 'NOT SURPRISING' AND COULD CONTINUE: ANALYSTS

According to economists, the slump in global oil prices pulled down headline inflation in Singapore. Global crude oil prices have fallen in recent months to about US$60 per barrel on Tuesday, as a result of weaker demand and reluctance on the part of oil producers to cut supply. 

They also said the headline inflation of -0.3 per cent did not come as a surprise as consumer prices in Singapore have been easing in recent months - as a result of effective monetary policy, as well as measures to curb rising property and car prices.

Economists added that Singapore could see deflation again for the month of December in view of falling oil prices. UOB has projected inflation to come in at -0.5 per cent while OCBC is looking at a range of between 0 and -0.2 per cent.

Should deflation persist, it can hurt the economic outlook. United Overseas Bank economist Francis Tan said: "One of the common-talked about potential negative impact of deflation or a deflationary spiral is that if consumers think that prices of one item is going to be cheaper or lower tomorrow, you will not want to spend today.

“That is going to affect domestic consumption right now, that will be the detrimental effect of deflation, and that is actually what we are seeing in the Eurozone."

However, economists said the chances of Singapore falling into a deflationary spiral are slim. Head of Treasury Research and Strategy at OCBC Bank Selena Ling said: “If you look back at 2009, that was on the back of the great financial crisis and even then, Singapore only saw six months of negative CPI prints.

“What is really different today is you do not have an ongoing global recession story or financial crisis, apart from the rouble crisis that is brewing in Russia. And I think on top of that, if you look at domestic labour market, because of the whole economic restructuring story, actually you have a very tight labour market, so I suspect you are going to see continued wage cost inflation."

The increase in wage cost could be passed to consumers in the form of more expensive food and services. Economists said as a result, core inflation, which strips out accommodation and private transportation costs may see an uptick next year.

* Consumer prices slip for second month in a row
Fluctuating COE premiums and cheaper oil help lower inflation in 2014 to just 1%
By Chia Yan Min, The Straits Times, 24 Jan 2015

NEGATIVE inflation struck for the second consecutive month in December on the back of a continuing decline in oil prices.

The effect - also known as deflation - occurs when prices slip over the same period a year earlier.

Consumer prices were down 0.2 per cent last month over December 2013, mainly due to fluctuations in certificate of entitlement (COE) premiums and cheaper oil. This brought inflation for last year to just 1 per cent, less than half of the 2.4 per cent recorded in 2013 and the lowest since 2009.

The reading came in at the low end of official forecasts, which tipped inflation for 2014 at between 1 and 1.5 per cent. Last month's reading follows a contraction of 0.3 per cent in consumer prices in November. Economists expect the rate of inflation to remain low or negative in the coming months amid weak oil prices.

The deflationary reading last month was driven by fluctuating COE prices and a soft housing rental market, in addition to cheaper crude.

Petrol pump prices declined 11.2 per cent in December, after falling 4.3 per cent the previous month. Accommodation costs were 1.4 per cent lower, extending November's 1.2 per cent fall, as a result of the soft rental market.

Food and prepared meals were the largest positive contributing factor to inflation last month.

While consumers are unlikely to see prices of everyday products decline, lower oil prices are having a dampening effect on core inflation.

Core inflation - which excludes the costs of accommodation and private road transport and is seen as a better measure of everyday out-of-pocket costs - came in at 1.5 per cent last month, unchanged from November.

Core inflation edged up to 1.9 per cent for the whole of last year, from 1.7 per cent in 2013.

If oil prices stay low, both headline inflation and core inflation could come in below forecasts this year, the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) said in a joint statement yesterday.

Official forecasts tip headline inflation at between 0.5 and 1.5 per cent this year, while core inflation is expected to range from 2 to 3 per cent.

Though wage costs will remain high due to the tight labour market, the MAS and MTI said the impact on consumer prices will be "uneven" and "influenced by demand conditions in the different consumer segments". The joint statement sparked a flurry of speculation among economists about the MAS' upcoming policy meeting in April.

The deflationary global outlook and tepid economic growth could prompt the central bank to slow the Singdollar's rate of appreciation, economists say.

The exchange rate is the Government's main tool to combat inflation: A stronger currency means imports cost less in Singdollar terms.

Compared with previous statements, the MAS and MTI were "more explicit" in acknowledging that inflation might come in lower than expected, said Citi economist Kit Wei Zheng.

OCBC economist Selena Ling said yesterday's statement hints at a "subtle but maybe important shift in tone".

ANZ economists Daniel Wilson and Glenn Maguire expect the MAS to keep its policy unchanged at the April review.

"However, as headline inflation continues to trend near zero.... and economic data prints on the weaker side, the risk of an easing has increased," they added.