ANCHOR OF ECONOMIC

AND FINANCIAL STABILITY

THE ECONOMY
INFLATION EASED ON LOWER OIL PRICES

MAS Core Inflation, which excludes the costs of accommodation and private road transport, rose to 1.9% in 2014, from 1.7% in 2013. This was mainly due to higher food inflation, partly on account of weather-related supply disruptions in the region and some pass-through of domestic costs to the prices of prepared meals. Services inflation eased, although the costs of some items, such as education and healthcare, continued to rise at a faster pace than overall core inflation

CPI-All Items inflation moderated to 1.0% in 2014, from 2.4% in the preceding year as a result of the smaller rise in accommodation cost and a decline in private road transport cost, following measures by the government to cool the housing and motor vehicle markets.

Both MAS Core and CPI-All Items inflation eased in Q1 2015, to 1.1% and −0.3% respectively. Following the plunge in global oil prices in late 2014, the cost of domestic oil-related items, including petrol and electricity, fell sharply. Cost pass-through also moderated given subdued domestic economic growth, while healthcare costs were lower as a result of enhanced government subsidies. Softer housing rentals and car Certificate of Entitlement (COE) premiums also continued to have a dampening effect on inflation during the quarter.

Looking ahead, external sources of inflation should be generally benign, given ample supply buffers for major commodities. While there is considerable uncertainty over the outlook, global oil prices for the whole of 2015 are likely to average significantly below their 2014 level. Domestic cost pass-through could be tempered by the moderate growth environment, while budgetary measures will reduce prices for some consumption items. In addition, there will be a further disinflationary effect from the expected increase in the supply of COEs and housing units. Taking all these factors into account, both MAS Core Inflation and CPI-All Items inflation are expected to be lower in 2015 compared to last year.

However, the labour market remains tight, with the resident unemployment rate near to its 10-year historical low. The risk, therefore, is that underlying cost pressures could mount and the pass-through to consumer prices could pick up, especially if economic conditions become more supportive. Along with some recovery in global oil prices and the dissipation of the effects of budgetary measures, inflation could rise going into 2016.