Core inflation to stay subdued amid coronavirus outbreak

Core inflation slowed sharply last month with prices likely to stay down in the months ahead in the light of lingering economic uncertainty underpinned in part by the coronavirus outbreak.

Core inflation, which excludes the costs of accommodation and private road transport, came in at 0.3 per cent compared with the same month last year and well under the 0.6 per cent recorded in December.

Overall inflation stood at 0.8 per cent last month, unchanged from December. But the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry noted yesterday that part of the fall in core inflation reflected the impact of consumer price index rebasing from 2014 to last year.

This is done every five years to reflect changing household consumption patterns.

The agencies forecast that external sources of inflation are likely to remain benign amid weak demand and generally well-supplied food and oil commodity markets.

On the domestic front, the labour market continued to soften slightly, which could lead to a moderation in unit labour cost growth this year. They also expect inflationary pressures to remain subdued in the near term.

At this stage, the 2020 forecasts for MAS core inflation and overall inflation remain at 0.5 to 1.5 per cent.

Assistant Professor Aurobindo Ghosh from the Lee Kong Chian School of Business at Singapore Management University said the virus outbreak might have two opposite effects: “Reduced supply of raw materials might temporarily increase the cost of certain items.

“However, the potential loss of jobs due to reduced growth in China might also mean there would be less of a demand for such items, which in turn will have a more depressing effect on prices. Overall… loss of demand might reduce price pressures across the board.”

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye agreed that the collapse in demand would likely outweigh any price pressures from supply chain disruptions, concluding that the outbreak would impose “a severe deflationary impact”.

Ms Selena Ling, OCBC Bank’s head of treasury research and strategy, said there might be muted price pressures, especially for the transport and recreation segments, similar to the 2003 severe acute respiratory syndrome period.

Private transport inflation last month rose to 4.6 per cent.

The cost of electricity and gas fell at a slower pace – at 8.1 per cent, as regulated power tariffs increased even while the Open Electricity Market continued to have a dampening effect on overall electricity prices.

Accommodation costs rose to 0.3 per cent with a pick-up in housing rentals, which turned around after more than five years of decline.

Food inflation was unchanged at 1.7 per cent. But the cost of retail and other goods recorded a steeper drop, with a 1.4 per cent slip last month as the prices of medical products and clothing and footwear registered larger declines.

Services inflation was also lower, with a decline in tuition and other fees, reflecting the effect of enhanced pre-school subsidies.

United Overseas Bank economist Barnabas Gan said the lack of inflation risk might spur an easing of monetary policy during the MAS meeting in April to spur growth.

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