Inflation turns positive after two years of negative readings

Inflation turned positive last month for the first time in more than two years - a potent sign that prices are on track to climb at a faster pace this year, on the back of gradually recovering oil prices.

The consumer price index - the main measure of inflation - inched up 0.2 per cent last month compared with the same month a year ago.

Though a tiny increase, this followed 24 straight months of sliding readings from November 2014 to October last year, and a reading of zero per cent in November.

Lower oil and car prices and falling accommodation costs - partly due to the soft property market - were the main drivers behind that long bout of negative inflation.

However, prices of necessities such as food, education and healthcare have continued to inch upwards over this period. That is why the central bank does not regard this run of falling prices as "deflation" - which indicates a chronic lack of demand across an economy.

Oil prices plunged in the second half of 2014 from above US$100 a barrel to below US$50, due to oversupply in the global markets. They have since recovered to about US$55 a barrel. This has already started having an impact. Last month's inflation uptick was led by higher private road transport costs, which increased 1.7 per cent due to costlier petrol and higher carpark fees.

Inflation is likely to continue rising on the back of higher global oil prices this year, according to a joint statement from the Trade and Industry Ministry and the Monetary Authority of Singapore yesterday.

Oil prices plunged in the second half of 2014 from above US$100 a barrel to below US$50, due to oversupply in the global markets. They have since recovered to about US$55 a barrel.

This has already started having an impact. Last month's inflation uptick was led by higher private road transport costs, which increased 1.7 per cent due to costlier petrol and higher carpark fees.

Other consumer prices also rose. Services inflation edged up to 1.6 per cent from 1.5 per cent in the preceding month, mainly due to a faster pace of increase in holiday expenses. Food inflation was 2 per cent last month, unchanged from the previous month, while retail goods inflation eased to zero last month from 0.2 per cent in November.

Core inflation - which strips out accommodation and private road transport costs to better gauge everyday expenses - was 1.2 per cent last month, slightly lower than the 1.3 per cent in November, as the dip in retail goods inflation more than offset the increase in services inflation.

Core inflation for the whole of last year rose to 0.9 per cent from 0.5 per cent in 2015. Overall inflation came in at negative 0.5 per cent for the second consecutive year.

ANZ economist Ng Weiwen said that last month's return to positive inflation "disguises underlying softness" in the economy. "The subdued labour market will... put a lid on wage growth," he noted.

Citi economist Kit Wei Zheng said the fact that retail prices have not gone up significantly "suggests weaker pricing power for retailers amid muted domestic demand, possibly reflecting subdued consumer sentiment on the back of ongoing softness in the job market".

While the manufacturing sector has shown some signs of recovery and export numbers seem to be picking up, "thus far, there is little evidence of positive spillovers (from these) into domestically oriented sectors, which could remain bogged down by elevated debt levels, rising interest rates and job market slack in 2017 - a classic dual- economy scenario", Mr Kit added.

A version of this article appeared in the print edition of The Straits Times on January 24, 2017, with the headline 'Inflation turns positive after two years of negative readings'. Print Edition | Subscribe