Singapore core inflation drops for 4th straight month but analysts see strong price pressures ahead

Last Updated on September 25, 2023 12:20 pm

By Claire Huang

SINGAPORE – Consumer prices in Singapore rose at a slower pace for a fourth straight month in August, but economists believe the trend could falter if oil prices stay elevated and disruptive weather patterns lead to higher food prices.

The analysts also expect policymakers to stay vigilant, but do not see a further tightening of monetary policy to combat higher inflation when the Monetary Authority of Singapore (MAS) next reviews its position in October.

Official figures on Monday showed core inflation, which excludes private transport and accommodation costs to better reflect the expenses of Singapore households, dropped to 3.4 per cent year on year in August, from 3.8 per cent in July.

This was nearly in line with the 3.5 per cent median forecast of analysts in a Bloomberg poll.

The easing came on the back of smaller increases in the prices of services, food, retail and other goods.

Headline inflation, or the overall consumer price index (CPI), also edged down, to 4 per cent in August from 4.1 per cent in July, as declines in core and accommodation inflation more than offset the rise in prices of private transport.

On a month-on-month basis, which represents how much momentum there still is in prices, core consumer prices crept up 0.1 per cent in August, on account of higher costs of food and services.

Core inflation is expected to moderate further over the next few months as imported costs stay low compared with year-ago levels and the current tightness in the domestic labour market eases, MAS and the Ministry of Trade and Industry (MTI) said in their joint media release.

Private transport inflation is expected to pick up in the near term, led by sustained strong demand for cars, while accommodation inflation should continue to ease over the course of the year, given the ramp-up in the supply of housing units available for rental.

MAS and MTI also maintained their forecasts for overall inflation for 2023 at between 4.5 per cent and 5.5 per cent, while core inflation was pegged at between 3.5 per cent and 4.5 per cent.

Maybank economist Chua Hak Bin said inflation might not ease as quickly for the rest of the year as energy and food prices have rebounded.

“The impending GST (goods and services tax) and carbon tax hike on Jan 1 next year may also trigger another jump in consumer prices,” said Dr Chua.

GST is set to rise by 1 percentage point to 9 per cent from Jan 1, while the carbon tax will go up to $25 per tonne of greenhouse emissions, from the current $5.

DBS Bank economist Chua Han Teng said he sees upside risks from the recent uptick in global oil prices due to Opec+ supply cuts, and potential global food price shocks from El Nino weather disruptions. Opec+ refers to the oil producer group comprising the Organisation of the Petroleum Exporting Countries plus allies.

Oil prices have surged more than 25 per cent since end-June, thanks to major producers Saudi Arabia and Russia extending their production cuts till year end and a brighter economic outlook for the United States.

The surge has rekindled talk of the possibility of US$100 a barrel crude, while increasing price pressures for importers.

Said Ms Selena Ling, OCBC Bank’s chief economist: “If energy prices sustain at current elevated levels, there could still be upward adjustments to household electricity tariffs for the fourth quarter of 2023.

“Moreover, the cost of delivering water has gone up and will likely continue to rise, following the last review of water prices in 2017 that saw a jump of 30 per cent over two years.”

Ms Ling added that any expectations for MAS to ease monetary policy or to adopt an even more dovish stance “may still be premature”.

Bank of America Asia and Asean economist Ang Kai Wei said in a note that he expects MAS to keep its monetary policy on hold for some time, as past tightening moves will likely be seen as sufficient in supporting the latter stages of disinflation.

“We also expect no change to foreign exchange settings in 2024, but the risk is skewed towards a steeper slope to deliver more durable tightening,” he added.

Monday’s data showed private transport inflation recorded the steepest increase to 6.3 per cent in August, from 4.8 per cent in July. Cars saw a bigger hike in prices, while petrol prices recorded a smaller decline.

Electricity and gas costs continued to fall, but at a slower pace at 1.4 per cent. Inflation for food and retail continued to ease, falling in August to 4.8 per cent and 2 per cent respectively.

Services inflation fell to 3.1 per cent in August, on the back of smaller hikes in holiday expenses, telecommunications, recreational and cultural services costs, as well as a larger decline in airfares.

Accommodation inflation edged down to 4.4 per cent as the pace of increase in housing rents eased.

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