First, I will summarize the recent inflation developments, and then compare the short term forecasts in the October Inflation Report with the actual inflation data regarding the fourth quarter of 2011. There were a few developments in the interreporting period which led inflation to deviate significantly from October forecasts. More-than-envisaged increases in unprocessed food prices were an important cause of this deviation. The ongoing depreciation in the Turkish lira amid the deterioration in the risk appetite was another factor leading to a deviation in short-term forecasts (Chart 8). BIS central bankers’ speeches  5  Chart 8. October 2011 Inflation Forecasts and Realizations  * Shaded region indicates the 70 percent confidence interval for the forecast. Owing to the lagged effects of the exchange rate pass-through, core inflation indicators remained at elevated levels during the final quarter (Chart 9). This mainly stemmed from soaring core goods prices, while the moderate course of the underlying trend of services inflation indicated a benign outlook in terms of second round effects (Chart 10). Chart 9. Chart 10. Core Inflation Indicators SCA-H and SCA-I  Prices of Core Goods and Services  (Seasonally Adjusted, 3-Month Average, Annual Percent Change)  Source: TurkStat, CBRT. (Seasonally Adjusted, 3-Month Average, Annual Percent Change)  Source: TurkStat, CBRT. We see that economic activity remained robust in the second half of 2011, despite a slight deceleration. Gross Domestic Product (GDP) data pointed that domestic demand proved stronger in the third quarter of 2011 compared to the outlook presented in the October Inflation Report (Chart 11).

Over the past few months, CPI accommodation costs were boosted by an unexpected surge in the number of tenancy contract renewals at current higher rental rates. This resetting of old rental contracts could persist into the second half of this year. We therefore expect accommodation costs to impact CPI inflation more strongly than previously. Second, private transport costs. COE premiums have risen faster than expected, reflecting rising incomes and sharp cuts in COE quota to its lowest in more than a decade. This uptick in headline inflation should be seen in perspective. A better measure of underlying price pressures in economy is MAS’ measure of core inflation. Core inflation excludes private road transport and accommodation costs, as these items are subject to short-term fluctuations. These items also do not affect the day-to-day outlay of most Singaporean households. Core inflation is the measure MAS monitors most closely, among a range of indicators. Compared to headline inflation, core inflation was much lower at 2.2% in April and May. This reflects in part MAS’ pre-emptive tightening of monetary policy in April and October last year, which has helped to dampen some cost increases. A stronger Sing Dollar has helped, not just by filtering oil and food price increases, but also by providing a restraining effect on the economy. The strong exchange rate has capped upward pressure on prices. For the whole of 2011, the projection for MAS’ core inflation remains unchanged at 2–3%. This is not to suggest we are entirely satisfied with the inflation situation.