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Singapore’s maids scrub out inflation

Singapore pre-school children walk along the Singapore River waterfront.
Roslan Rahman | AFP | Getty Images
Singapore pre-school children walk along the Singapore River waterfront.

Singapore may be famed as one of the most expensive cities in the world, but prices are dropping, with analysts giving the credit to the city-state's legions of maids.

For two years running, Singapore was ranked as the world's most expensive city by the Economist Intelligence Unit (EIU), with high price tags on clothing, transportation -- particularly the fee system for buying cars -- and housing.

But in May, the consumer price index surprised analysts by dropping a larger-than-expected 0.4 percent on-year. That's an eyebrow-raiser for an import-dependent country with a depreciating currency and rising wages.

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"The surprise was driven by one of the normally mundane components: Household durables and services," Philip McNicholas, an analyst at BNP Paribas, said in a note Tuesday.

That fell 2.0 percent on year, slicing 0.3 percentage point from the monthly core consumer price index (CPI), he said.

"The reason for this sharp swing was the halving of the foreign domestic worker (i.e. maid) levy that was announced by the government earlier this year in the budget."

Why was one item in the budget big enough to push the island-nation toward outright deflation?

Singapore has around 220,000 maids, officially called foreign domestic helpers.

The government requires their employers to pay a monthly levy as a pricing mechanism to regulate the number of foreign workers.

The normal rate is 265 Singapore dollars a month ($197), but the government has a "concessionary" rate for families who need help caring for young children, people with disabilities or the elderly.

In the latest budget, the government expanded the number of families eligible for that rate as well as cutting it by half to 60 Singapore dollars a month -- a step it estimated would affect nearly 145,000 households.

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The city-state's notoriously studious students can also get a bit of extra credit for the price declines: another budget measure eliminated examination fees at government-funded and poly-technical schools, something which could save families around 900 Singapore dollars a year.

Some of the price changes might cost Singapore its most-expensive crown. The housing component of CPI fell 3.8 percent on-year in May after declining a similar amount in April, as newly developed properties hit an oversupplied market.

Additionally, while transportation costs were up 0.9 percent from a year earlier, many analysts expect those prices will decline as the government will increase the number of permits to own a vehicle, known as Certificate of Entitlements (COEs), by 42 percent in the second quarter. Private transportation costs account for nearly 12 percent of the CPI basket.

Singapore's grocery shoppers are also likely to get more bang for their Singaporean buck. While the Singapore dollar has lost value against the U.S. dollar, it's gained ground against a steadily weakening Malaysian ringgit, bringing down the costs of food imported from the city-state's northern neighbor.

Since the beginning of the year, the Singapore dollar has fallen around 2 percent against the U.S. dollar, but it's gained around 6 percent against the ringgit.

"That may translate into lower wholesale prices for several food categories (particularly fruits & vegetables). In fact, we think that in next month's CPI report, we may see even lower food inflation," Francis Tan, an economist at UOB, said in a note Tuesday. "At slightly more than 20 percent of the entire consumption basket, significant slowdown in food inflation will likely impact core inflation to a bigger extent."

It isn't always clear how much of the ringgit's declines will get passed through to Singapore's consumers when they shop for fresh foods. Fruit sellers at the Tanjong Pagar wet market in Singapore's central business district told CNBC that prices for one of the city-state's favorite fruits, the odiferous durian, can still vary widely depending on size and type, despite being sourced from Malaysia.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1