July price increase the slowest in 3 years; MAS tweaks core inflation outlook

SINGAPORE inflation cooled below expectations in July, prompting the Monetary Authority of Singapore (MAS) to ease its full-year outlook slightly, according to data released on Friday.

Core inflation - a key MAS indicator that strips out private road transport and accommodation expenses - slipped to 0.8 per cent, its weakest showing since April 2016, against 1.2 per cent in June. The figure was also lower than the estimate of 1 per cent by private-sector economists.

MAS chief economist Edward Robinson had soundly rejected off-cycle adjustments to the Singdollar policy last week, reiterating a full-year core inflation forecast of 1 per cent to 2 per cent.

But the MAS' view has now shifted from "near the mid-point" to the lower half of the range. This is the second change to the official inflation outlook, after February, when the headline inflation forecast was lowered by half a percentage point, to between 0.5 per cent and 1.5 per cent.

This was even as accommodation costs fell by 0.9 per cent, slower than 1.1 per cent in the month prior, on the slower decline in rent, while the cost of private road transport rose by 0.3 per cent - up from 0.2 per cent in June - as repair and maintenance costs picked up.

Meanwhile, headline all-items inflation slipped for the second month.

It eased to 0.4 per cent in July, down from the 0.6 per cent price increase registered in June and below the estimate of 0.5 per cent in a Bloomberg poll.

The more gradual increase in everyday expenses came on a fall in the prices of retail goods and water, as well as a larger decline in the cost of electricity and gas.

Food inflation held steady at 1.4 per cent in July, as higher food services offset a smaller increase in the prices of certain food items.

But electricity and gas costs fell by a sharper 7 per cent, against 4.8 per cent in June, on a smaller rise in electricity tariffs and the national roll-out of the Open Electricity Market.

Meanwhile, the prices of retail and other goods turned negative year on year, declining by 1 per cent, compared with the previous month's 0.4 per cent increase.

The drop in this segment came on a bigger fall in clothes and shoe prices, as well as the base effect from water price hikes in previous years.

Services inflation - which came in at 1.6 per cent, down from 1.7 per cent in June, on slower growth in holiday costs and a bigger drop in telecommunications fees - also cooled the scene.

The MAS and the Ministry of Trade and Industry (MTI)reiterated in a joint statement that "external sources of inflation are likely to be benign" and "acceleration in inflationary pressures is unlikely" on factors such as slower gross domestic product (GDP) growth and global uncertainty.

Singapore slashed its GDP forecast for the second time on Aug 13, lowering expectations to between zero growth and 1 per cent for 2019, from 1.5 per cent to 2.5 per cent before.

Citi analysts Kit Wei Zheng and Ang Kai Wei argued that risks of lower-than-expected inflation are still present, such as a wider slowdown in consumption or further escalation of global trade tensions.

Yet, an aggressively dovish move on monetary policy "is unlikely, as fiscal stimulus remains the first line of defence" for the economy, they added - noting again that impending foreign worker quota cuts "could moderate any downward cyclical pressures on wage growth".

"Labour market conditions have largely held up, contributing to moderate wage increases and higher unit labour costs," the MAS and MTI also said on Friday, tempering June's statement that conditions "will support" wage growth and "unit labour costs should continue to rise".

Such tweaks to the outlook statement "suggest the MAS may be less confident that price pressures will sustain", Barclays economist Brian Tan wrote in a flash note.

But he added: "Unless there are signs of a more worrying deterioration in labour market conditions by October, we believe the MAS would prefer to ease in a more gradual fashion."

Hewing to a similar view, economists at Standard Chartered (StanChart) wrote that the latest inflation print will likely prompt the MAS to modestly reduce the pace of the Singapore dollar's strengthening against other currencies, at its next monetary policy meeting in October.

But a larger downgrade of the inflation outlook "would have increased the risk... of easing (to flat slope)", the StanChart analysts warned, referring to a return to the stance held before April 2018, when the band within which the Singdollar can move was kept from appreciating for six years.

Still, economist Tan Khay Boon, senior lecturer at SIM Global Education, suggested that instability in the Middle East - where tensions have mounted in the Strait of Hormuz, as the MTI noted in its second-quarter GDP briefing - could drive up oil prices and reverse the decline in housing and utilities costs.