ANCHOR OF ECONOMIC

AND FINANCIAL STABILITY

THE ECONOMY
INFLATION FELL DUE TO LOWER OIL PRICES

MAS Core Inflation, which excludes the costs of accommodation and private road transport, eased to 0.5% in 2015, from 1.9% in 2014. This was mainly due to the sharp decline in the cost of oil-related items amid weaker global oil prices. The disinflationary effects of budgetary1 and other one-off measures2, as well as the more modest pass-through of cost increases to consumer prices, also contributed to lower core inflation last year.

CPI-All Items inflation moderated to -0.5% in 2015, from 1.0% in the preceding year, reflecting the more gradual increase in core consumer prices as well as the dampening effects of lower accommodation and private road transport costs. Car prices and housing rentals softened alongside an expansion in Certificate of Entitlement (COE) quotas and the completion of a large number of residential units last year.

In the first quarter of 2016, core and overall inflation diverged. MAS Core Inflation picked up to 0.5% from 0.2% in Q4 2015 as temporary disinflationary influences, such as the enhanced medication subsidies introduced at the beginning of 2015, abated. CPI-All Items inflation remained on a downtrend, falling to -0.8% in Q1 2016 from -0.7% in the previous quarter, as a result of larger declines in housing rentals and car prices (see Chart 2).

Looking ahead, external sources of inflation are likely to remain subdued, given ample supply buffers in the major commodity markets and weak global demand. Notably, global oil prices are expected to average lower for the whole of 2016 compared to 2015. On the domestic front, softer employment conditions will lead to a slowdown in wage growth. In addition, the pass-through of domestic costs to consumer prices will be constrained by the subdued economic growth environment.

MAS Core Inflation is expected to pick up gradually over the course of this year, reflecting the diminishing drag from oil prices as well as from budgetary and other one-off measures. However, this increase will be milder than earlier anticipated, reflecting the weaker external price outlook and domestic growth prospects, as well as reduced tightness in the labour market.

Meanwhile, the drag to CPI-All Items inflation from non-core components of the CPI basket is expected to intensify this year, as a large supply of car COEs and residential units comes on-stream.

 

1 The budgetary measures include medical subsidies under the Pioneer Generation Package, the reduction in the concessionary foreign domestic worker levy, as well as the abolition of national examination fees for Singaporeans.
2 These include SG50-related price promotions as well as temporary supermarket discounts in the second half of 2015.