Towards Financial Freedom
More Subdued Price Increases in Jul
- After hovering above 4% for over a year, headline inflation rose by a slower 4.0% yoy in Jul from 5.3% in Jun. This was in line with our call for inflation to moderate to 4.1% but was above market estimates for a 4.5% rise. Core inflation (excluding accommodation and private road transport) also eased to 2.4% yoy in Jul after staying at 2.7% for the past three months.
- The slower pace of inflation could be attributed to the more moderate increases in housing and transport cost. Housingcost slowed from 9.7% in Jun to 6.4% yoy in Jul, aided by the disbursement of rebates for service & conservancy charges to HDB households as well as the slower increase in imputed rentals for owner-occupied accommodation. Transport eased from 8.7% in Jun to 5.7% yoy in Jul on the back of lower COE premiums and petrol pump prices. It also helped that food prices and services inflation remained stable in Jul, rising by 2.3% and 2.8% yoy respectively in Jul, unchanged from Jun. However, we are beginning to see some pass-through from the tight labor market situation with health services cost up by 5.1% yoy in Jul vs. Jun's 4.6%.
- As we had expected, inflation has started to ease on the back of weaker oil prices, the government's responses to mitigate domestic conditions driving inflation higher and favorable base effects. This trend is likely to continue for the rest of the year, but headline inflation will nonetheless remain elevated at around 3.5% in 2H because of still-elevated accommodation and transport cost. Ourinflation forecast for the year remains at 4.3%, within the government's estimate of 4.0-4.5%. However, the government warned that upside risks to inflation remained if COE premiums continue to surge, but we expect more measures from the government to rein in the demand for private motor vehicles.
- \While we are now in a very difficult situation of slow growth and high inflation, this situation is unlikely to persist into 2013. We believe that MAS takes a longer term view of growth and inflation that just the current situation. Given the more positive outlook for next year but still mindful of the 'stagflation'-like situation we are in, we expect the MAS to remove the slight increase in the slope of the policy band of the April meeting but maintain its modest and gradualappreciation stance. However, a move to a looser policy, that is to a 'no appreciation' stance, is also possible if the global environment deteriorates, underpinned by the crisis in the Eurozone.
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