Inflation Next Year Unchanged - MAS

RESIDENTIAL MARKET

Inflation next year likely to stay at 3.5-4.5%: MAS

Price pressures next year will come from housing, cars, food and services, the Monetary Authority of Singapore (MAS) said yesterday, with overall inflation expectations unchanged at slightly above 4.5 per cent this year, and at 3.5 to 4.5 per cent in 2013.

The main sources of inflation are similar to this year's but with one exception - oil-related price pressures could be negligible as global economic weakness causes oil consumption to fall below production next year.

In its bi-annual macro- economic review, MAS said that inflation will likely come from domestic sources rather than from abroad, with the two biggest components being higher housing costs and car prices.

"Imported inflation will generally be benign, although food prices will face short-term upside risks from weather-related supply disruptions," it noted.

"At the same time, domestic supply-side factors have become more binding. In particular, persistent tightness in the labour market implies continuing pressures on wages and hence the prices of consumer services."

Higher imputed rentals on owner-occupied accommodation will add about 1.5 percentage points to the Consumer Price Index (CPI) this year and the next.

HDB rentals are relatively affordable and supply will be tight as a result of measures introduced in July to curb the sub-letting of HDB flats by permanent residents, MAS said.

The significant increase in the stock of completed HDB units since 2010 will only enter the leasing market in 2015 due to the five-year minimum occupation period.

Meanwhile, the stock of completed private residential units will rise further in coming years, from more than 10,000 units this year to a peak of 25,000 units in 2016, MAS said.

Tight supply is also why car prices will add one percentage point to the CPI.

The likely reduction to Certificate of Entitlement (COE) quotas in 2013 will cause COE premiums to edge up, MAS said.

Meanwhile, higher food prices and services costs are expected to contribute one-fifth of inflation each.

June's surge in the prices of food commodities, such as corn, wheat and soyabeans, caused by the drought in the United States, will translate into higher food prices towards the year-end and early next year, MAS said.

This is because the commodities are used in animal feed and price effects take some time to pass through. There will be a seasonal pick-up in demand towards the end of the year.

There are also upside risks if the El Nino weather pattern causes crop damage in Asia.

MAS expects wage costs to go up, especially for price-inelastic services, such as healthcare and education.

Services inflation is projected to be 3 per cent this year and slightly lower next year, but still higher than the historical average of 1.5 per cent.

Core inflation, a measure that strips out accommodation and private transport costs, is expected to come in at 2.5 per cent this year.

It will stabilise at between 2 and 3 per cent in 2013, but will be around 0.5 percentage point higher than its long-term average, MAS said.

Source: Business Times – 31 October 2012