Prices stabilise after long and slow decline

A lady shopping for groceries at Giant Tampines on Jan 13, 2016.
A lady shopping for groceries at Giant Tampines on Jan 13, 2016.PHOTO: ST FILE

Smallest fall in consumer price index in two years; spell of negative inflation may be over

Singapore's longest spell of negative inflation looks to be nearing an end as oil prices bottom out and stabilise.

The country experienced its 24th straight month of negative inflation in October, as the consumer price index - the main measure of inflation - logged a 0.1 per cent contraction over the same month a year ago. This was the smallest fall in two years.

Lower oil prices and falling car prices and accommodation costs - partly due to the soft property market - have been the main drivers behind this two-year bout of negative inflation.

The consumer price index has fallen 0.7 per cent in the January to October period compared with last year.

However, this has had minimal impact on the average household. Prices of necessities such as food, education and healthcare have continued to creep upwards.

This is why the central bank and most economists here do not regard this run of falling prices as "deflation", a term reserved for a more sustained and entrenched economic problem. Deflation indicates a chronic lack of demand across an economy, and is often accompanied by falling wages and asset prices as well as an economic recession.

While Singapore's negative inflation situation is not as dire, policymakers will likely be glad to see an end to it as it can have a "psychological effect", given its association with recessions, said CIMB Private Bank economist Song Seng Wun.

"It seems as though commodity prices have bottomed - albeit at low levels - and this should be reflected in inflation data going into 2017," he said.

The cost of oil-related items dropped by 3.7 per cent in October over the same month last year, compared with a sharper 8.4 per cent fall in September. This was due to a smaller decline in electricity tariffs and petrol prices.

Meanwhile, core inflation - which strips out accommodation and private road transport costs to better gauge everyday expenses - rose to 1.1 per cent, from September's 0.9 per cent.

The Monetary Authority of Singapore and the Trade and Industry Ministry expect oil prices to go up in 2017 from their trough this year. This is expected to contribute to a gradual uptick in inflation.

However, this will be offset by subdued economic growth and a softer labour market.

Government forecasters expect core inflation to average about 1 per cent this year, and to rise to 1 per cent to 2 per cent next year.

Citi economist Kit Wei Zheng said core inflation has been rising at a slower rate from month to month compared with historical averages, which may reflect slowing economic growth.

He pointed to weak trade numbers as a sign that growth in the October to December quarter could be lacklustre, and noted that upcoming manufacturing and labour market data will help to paint a clearer picture of the outlook.

A version of this article appeared in the print edition of The Straits Times on November 24, 2016, with the headline 'Prices stabilise after long and slow decline'. Print Edition | Subscribe