1. The consumer price index (CPI) inflation declined from 5.2 per cent in 2011 to 4.6 per cent last year. In the first two months of this year, inflation further moderated to an average of 4.2 per cent. Over the same period, CPI less imputed rentals on owner occupied accommodation (OOA), a measure which relates more directly to the actual cash spending of households, was lower at 3.7 per cent.

 

2. In terms of the drivers of CPI inflation, the two largest contributors last year were accommodation costs, particularly imputed rentals on OOA, and car prices. Nevertheless, housing rental growth has slowed more recently and if sustained, would lead to a slower pace of increase in accommodation costs. Certificate of Entitlement (COE) premiums have also moderated with the recent policy changes to tighten car loans, although they remain volatile and would need to be monitored closely. In all, we expect accommodation costs and car prices to account for around three-fifths of inflation this year.

 

3. Imported inflation is expected to be benign this year. In particular, food price inflation moderated from 3.1 per cent in 2011 to 2.1 per cent in 2012, and further to an average of 2.0 per cent in the first two months of 2013. Similarly, in tandem with a decline in global oil prices from the peak in March 2012, prices of oil-related items, including fuel and utilities, have trended downwards since the second half of last year. In the first two months of 2013, the prices of oil-related items were 0.8 per cent lower on average compared to a year ago.

 

4. Another driver of inflation is services costs. We recognise that as the economy restructures towards productivity-driven growth, tight labour market conditions may lead to an increase in wage costs during the transitional period. In turn, this could exert upward pressure on the prices of some consumer services, especially those with high labour content. However, as the Government is helping companies to defray some of the wage increases over the next three years through the Wage Credit Scheme, the pass through of higher wages to consumer prices is likely to be dampened. The Government is also committed to helping companies raise productivity through the various productivity initiatives. In the longer term, with productivity gains, firms will be able to afford higher wage costs and cope with higher business costs, without having to pass on the increased costs to consumers.

 

5. Taking into consideration the above factors, MTI and MAS expect CPI inflation for the whole year to come in at 3.5 to 4.5 per cent at this stage. The forecast will be reviewed in the upcoming MAS’ Monetary Policy Statement on 12 April.