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By Making Cars Harder to Own, Singapore Cools Inflation

Wednesday, 24 Apr 2013 | 3:52 AM ET
Wibowo Rusli | Lonely Planet Images | Getty Images

The high cost of living in the wealthy island state of Singapore may be a major bone of contention among its residents, but moves by the government to cool the auto market is having an impact on rising consumer prices.

Singapore's headline inflation in March eased to 3.5 percent from the previous year, the lowest since October 2010. That's also down from a rate 4.9 percent in February - mainly due to a big drop in COE (certificate of entitlement), a mandatory 10-year license fee paid by car owners, on top of the cost of the vehicle.

Currently, the average cost of obtaining a COE is just over $50,000, compared to around $70,000 in early March.

(Read More: World's Most Expensive Car Market Just Got Pricier)

Vincent Conti, Asia-Pacific economist at ANZ said measures introduced in February such as financing restrictions on car loans, which make it more difficult for the average Singaporean to afford one, will continue to impact transportation costs.

"Moving forward, we expect headline inflation to keep easing on a yearly basis on the back of lower car ownership premiums (COEs)," Conti said in a note. "Though we don't expect COE premiums to drop much further than current levels given that they have already dropped by almost 40 percent, much more moderate trends should now develop."

(Read More: Singapore February Inflation Up 4.9% From Year Earlier)

Nomura economists backed that sentiment, saying inflation is easing as "administrative measures that are bringing down COE prices sharply become reflected in the CPI (consumer price index)."

Private road transportation costs, a component of inflation largely derived from COE premiums, are still rising, though at a slower pace. They rose 8.6 percent in March year-on-year, down from 17.4 percent in February.

Tim Condon, head of Asian economic research at ING, however, is not convinced that the cooling measures in the auto market will continue to have an impact on consumer prices.

"Eventually low headline inflation will translate into low inflation expectations. But as Singapore's disinflation has been driven by the subcomponents that are subject to macroprudential measures, more such measures may be needed to sustain disinflation," Condon said in a note.

While transportation inflation eased in March, accommodation inflation remained high at 5.8 percent, Condon points out.

Property measures introduced by the Singapore government in January to cool the market slowed private property price growth to 0.5 percent in the first quarter from 1.8 percent in the previous quarter.

(Read More: Growth in Singapore Housing Prices Slows in First Quarter)

But Conti of ANZ said that while he expects the accommodation component of inflation to continue to rise, he thinks "the downward effect on the private transport costs to win out between the two non-core components."

- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu