Experts anticipate sustained inflation levels before a potential decline in late 2023.
SINGAPORE: Singapore’s core inflation rose to 5.3% in September, driven primarily by significant increases in food prices, services, and retail goods, according to official data released on Tuesday (Oct 25). This figure marks an increase from 5.1% in August, inching closer to a 14-year high. The last time core inflation exceeded this level was in November 2008, when it stood at 5.5%.
Core inflation excludes accommodation and private transport costs. The headline consumer price index, or overall inflation, remained at 7.5% year-on-year in September, unchanged from August. “Core inflation is projected to remain elevated in the coming quarters before gradually slowing in the second half of 2023, as tight domestic labour market conditions ease and global inflation moderates,” stated the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) in a joint release.
Food inflation surged due to steeper price increases in food services and non-cooked food, reaching 6.9% in September. Accommodation inflation also rose alongside increased housing rents, hitting 4.9% for the month. Services inflation climbed to 4%, driven by higher costs for point-to-point transport services and holiday expenses. In contrast, private transport inflation decreased to 22.3% from 24.1% in August, attributed to a slower pace of car and petrol price increases. Retail and other goods also saw a faster pace of price increases, recording 3.1% in September, with inflation in telecommunication equipment, medicines, health products, and personal care items rising. Meanwhile, inflation for electricity and gas remained steady at 23.9%, unchanged from August.
For the full year, overall inflation is anticipated to average around 6%, while MAS core inflation is projected at approximately 4%. In 2023, considering various factors, including the Goods and Services Tax (GST) increase, headline and core inflation are expected to average between 5.5% to 6.5% and 3.5% to 4.5%, respectively. Excluding the temporary effects of the GST hike, headline and core inflation are anticipated to be between 4.5% to 5.5% and 2.5% to 3.5%, respectively.
MAS and MTI noted rising risks to the inflation outlook, citing potential fresh shocks to global commodity prices and more persistent external inflation.
Labour Costs and Wages on the Rise
Singapore’s imported inflation is likely to remain significant for some time due to global conditions, according to MAS and MTI. They noted that global demand conditions in major economies and supply chain frictions have continued to ease, and while prices for energy and food commodities have declined from their peaks earlier in the year, they remain high due to ongoing supply constraints.
Additionally, tight labour markets in major advanced economies are keeping wage pressures strong. “On the domestic front, unit labour costs will increase further in the near term alongside robust wage growth,” the agencies stated. Utility costs are expected to remain elevated, and firms are likely to continue passing on accumulated import, labour, and other business costs to consumer prices.
In June, the Government unveiled a S$1.5 billion support package aimed at providing immediate relief from rising inflation for those most affected. “The support measures in this package are directed towards assisting lower-income and vulnerable groups, as they are disproportionately impacted by inflation,” said Deputy Prime Minister and Finance Minister Lawrence Wong at that time. Key measures include a one-off GST Voucher cash payment of up to S$300 for eligible Singaporeans, along with a S$100 utility rebate for all Singaporean households.
MAS Expected to Tighten Policy Further: Economists
Following the release of inflation data, private-sector economists indicated that they are maintaining their inflation forecasts for 2022. Maybank economists expect core inflation to be at 4.2% for the year, while headline inflation is projected at 6.2%. “The wage-price spiral may intensify in the coming quarters, with the progressive wage model expanded to cover food services, waste management, and occupational sectors from Mar 1, 2023,” noted Dr. Chua Hak Bin and Ms. Lee Ju Ye in a report.
Accommodation costs are expected to continue rising with the return of non-resident workers, delays in property completions, and potentially higher demand from property sellers navigating the 15-month HDB wait-out period. RHB senior economist Barnabas Gan estimates core inflation at 3.8% and headline inflation at 5.8%.
With inflation indicators remaining elevated, economists anticipate that the MAS will tighten monetary policy further at its next policy meeting scheduled for April 2023. The central bank has tightened monetary policy five times since last October, including two off-cycle moves, to help mitigate inflation pressures. Unlike most central banks that manage policy through interest rates, MAS uses the exchange rate as its primary tool due to Singapore’s open economy reliant on trade.
The MAS manages the Singapore dollar’s nominal effective exchange rate (S$NEER) against a trade-weighted basket of currencies from Singapore’s major trading partners, allowing it to float within an unspecified policy band. Its latest move on Oct 14 involved re-centring the mid-point of this policy band to its current level.
Reasons for the MAS to maintain a hawkish stance include the expectation that core inflation—a key gauge for the central bank—will persist above the symbolic 2% threshold until the first half of next year, indicating that tighter monetary policy is necessary to address price pressures, according to Mr. Gan.
Upside risks to Singapore’s inflation outlook remain, including unexpected shocks to global commodity prices and persistent external inflation. Additionally, the S$NEER has experienced significant strengthening since the MAS’s last tightening move. Noting that the S$NEER has risen to 1% above the mid-point in just over a week, Mr. Gan commented that “more appreciation headroom may be needed for a stronger Singapore dollar in response to the current inflation environment.”
Maybank economists predict another re-centring by the MAS. “Our model suggests that the S$NEER is currently trading at about 1.1% above the mid-point of the new re-centred band, indicating potential for further appreciation,” they stated.
