Prospect and Implications of Prolonged Deflation for Singapore

Mr Ang Wei Neng asked the Minister for Trade and Industry whether Singapore will slide into a longer period of deflation after the headline inflation has slipped into negative territory for the seventh consecutive month in May 2015 and what will be the implications of prolonged deflation for Singapore.

In the first five months of 2015, CPI-All Items inflation averaged -0.4% on a year-on-year basis. However, the negative inflation rates are not an indication that the Singapore economy is experiencing deflation, as the price declines are not broad-based nor are they expected to persist.

First, the negative rates of inflation experienced were primarily due to price declines in specific categories of the consumption basket, rather than broad-based price declines which would have been symptomatic of a general weakness in demand in the economy. In particular, the negative inflation rates largely reflected the impact of three factors.

One, lower car prices and housing rentals, which contributed to a 0.7 percentage-point drop in CPI-All Items inflation on average in the first five months of the year. These price declines were, in turn, the result of a deliberate effort by the Government to cool the property market, following the sharp run-up in housing costs over the past few years, as well as lower Certificate of Entitlement (COE) premiums this year due to an increase in the supply of COEs. Excluding the costs of private road transport and accommodation, MAS Core Inflation, which is a better measure of underlying price pressures, was positive at 0.8% from January to May 2015.

Two, the sharp fall in global oil prices since late 2014, which has dampened the domestic prices of oil-related items, including petrol, electricity and gas. In all, the decline in the prices of oil-related items contributed to a 0.6 percentage-point drop in CPI-All Items inflation on average in the first five months of the year.

Three, the disinflationary impact of a suite of budgetary measures introduced by the Government to help households cope with the cost of living. These include measures like enhancements to medical subsidies and waiver of national examination fees, which have lowered the prices of consumption items, such as healthcare services, medication and education.

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Second, the dampening effects of lower oil prices and budgetary measures are expected to dissipate. Specifically, the Brent benchmark oil price recently rose from a trough of US$49 to around US$64, and market expectations are for prices to edge up gradually into 2016. As such, the drag posed by oil-related items on overall inflation on a year-on-year basis should dissipate towards the end of the year and into 2016. Similarly, the impact of the budgetary measures on year-on-year inflation is expected to start to dissipate towards the end of the year.

Reflecting these factors, the MAS Core Inflation is expected to stay subdued at around the current rate over the next few months, while CPI-All Items inflation could ease further due to the drag from car prices and housing rentals. However, both MAS Core Inflation and CPI-All Items inflation are projected to rise towards the end of the year and into 2016, on account of higher global oil prices and as the effects of the budgetary measures dissipate. For 2015 as a whole, MAS Core Inflation and CPI-All Items inflation are expected to average 0.5% to 1.5% and -0.5% to 0.5%, respectively.

In sum, MTI's and MAS' assessment is that the Singapore economy is not experiencing deflation nor is it likely to slip into deflation. MTI and MAS will continue to closely monitor price developments in the economy.