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Inflation may not fall even if COE tumbles

PRICES of certificates of entitlement (COEs) may have tumbled but there is no guarantee that inflation will also fall as a result, economists said yesterday.

First, rising wage inflation may more than offset any potential fall in overall car prices, they say. And second, some question whether all car prices will necessarily fall.

The Government curbed car loans drastically last month and introduced a tiered taxation system that hit luxury cars hard. Part of the reason for doing so was to cool the COE market and “alleviate overall inflationary pressures in the economy”, said

Deputy Prime Minister Tharman Shanmugaratnam at the time. This was certainly the effect seen at the first COE auction since the cooling measures, held on Wednesday.

COE prices tumbled most for big cars, falling 37.3 per cent while small-car COEs also fell but by a far smaller 4.6 per cent.

Credit Suisse economist Michael Wan said he believes this could lead to inflation falling by a as much as one percentage point for April’s inflation figure.

Private transport forms about 11 per cent of the consumer price index, so a fall in COE prices could have a significant “disinflationary effect”, assuming other parts of the CPI do not change drastically, he said.

Within private road transport, the “car and other vehicles” component includes elements other than the price of the COE.

But the fall in COE prices was probably a “knee-jerk reaction” to the policy changes, said Barclays Capital economist Joey Chew.

“The knee-jerk drop was pretty large for the bigger cars. But I’m already hearing people say they will go bid, now that it’s cheaper. Such is bidding psychology,” she said.

“It will take a few rounds for the market to find equilibrium.”

Bank of America Merrill Lynch economist Chua Hak Bin also noted that there are many other factors that could negate the fall in the COE prices.

For one thing, the new additional registration fee tiers could mean much more expensive bigger cars, notwithstanding the fall in COEs.

“Ultimately, it is an issue of demand and supply. People still want to buy cars and can afford them. At the same time, COE supplies will be cut in the second half of the year,” he said. “Together, it will be hard to say if prices of cars will indeed fall.”

The other looming factor is the continuing upward pressure on wages owing to a tight labour market, which could translate into higher inflation throughout the economy.

Although higher wages are not directly reflected in the CPI, the extra cash in workers’ pockets tends to drive up prices of goods and services.

Ms Chew said that wage inflation could be the bigger threat this year.

“Labour cost pressures are here to stay for a while, during the course of economic restructuring,” she said. “So if growth does pick up, then wage pressures and the pass-through to consumer prices may become more significant.”

The Monetary Authority of Singapore expects inflation to come in between 3.5 per cent and 4.5 per cent this year.

aaronl@sph.com.sg

This story was first published in The Straits Times on March 15, 2013

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