Singapore core consumer prices fall further in December, but headline inflation flat

SINGAPORE saw core consumer prices fall further in December, even as the headline measure moved out of deflation, according to Department of Statistics (Singstat) consumer price index (CPI) figures on Monday.

Core inflation fell to -0.3 per cent year on year, while headline inflation was flat at 0 per cent.

Economists had expected both core and headline inflation to hold steady from the previous month at -0.1 per cent, but the divergence was fuelled by an increase in private road transport costs.

With the December figures, full-year core and headline inflation both came in at -0.2 per cent in 2020, down from 1 per cent and 0.6 per cent respectively in 2019.

But economists expect prices to pick up again in 2021. While the pandemic recession imposed deflationary pressures via a weaker labour market and lower services demand, these pressures "will likely recede in 2021 as the economy and labour market slowly recover", said Maybank Kim Eng analysts Chua Hak Bin and Lee Ju Ye.

The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) kept their 2021 inflation estimates unchanged, with only minor revisions to their outlook for the coming quarters.

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The fall in core inflation, which strips out accommodation and private road transport costs, was driven by services deflation deepening to -0.8 per cent, from -0.2 per cent in November. .

Food inflation also fell to 1.6 per cent, down from 1.8 per cent in November.

In contrast, other categories saw deflation ease.

The cost of retail and other goods fell 1.2 per cent, easing from November's 2 per cent fall.

Electricity and gas costs declined 6.7 per cent, compared to November's 6.8 per cent fall.

Headline inflation was boosted by private transport costs, which rose 1.2 per cent in December on the back of a sharper increase in car prices, a turnaround from November's -1.3 per cent figure. Accommodation inflation was steady at 0.3 per cent.

For the full year, the only Singstat categories with positive inflation were food (1.9 per cent); communication (0.7 per cent); and household durables and services (0.3 per cent).

In a joint statement, the MAS and MTI maintained their 2021 forecasts for core inflation to average zero to 1 per cent, and headline inflation to be between -0.5 and 0.5 per cent.

But they now expect external inflation to pick up in the quarters ahead amid a recovery in global oil prices, in contrast to the previous release where they had expected it to remain low.

Nonetheless, they added that "the extent of the increase will be capped by persistent negative output gaps in Singapore's major trading partners". They expect domestic cost pressures to stay low, as wage growth and commercial rents are likely to remain subdued.

Accommodation costs are expected to fall as rentals could soften, due in part to the decline in foreign employment, while private transport costs "should rise modestly" amid an anticipated reduction in the supply of Certificates of Entitlement in 2021.

UOB economist Barnabas Gan sees the balance of risks for 2021 inflation to be tilted to the upside, identifying three factors driving inflation: the expected recovery in oil prices; the slow dissipation of disinflationary effects from government subsidies in 2020; and rising prices of domestic services on the back of the economic recovery.

He expects both headline and core inflation to average 0.5 per cent in 2021, as do the Maybank economists as well.

Barclays trimmed its 2021 core inflation forecast to 0.5 per cent, from 0.6 per cent previously, but raised its headline inflation forecast to 0.7 per cent, from 0.3 per cent previously, as private road transport cost inflation had turned positive earlier than forecasted.

OCBC economist Selena Ling, who has the same forecasts, expects the first positive year-on-year headline CPI print as early as this January, potentially at 0.1 per cent. But this year’s mild reflation – due partly to 2020’s low base – is unlikely to pressure MAS to recalibrate monetary policy, she added.

Economists continue to expect the MAS to hold steady at its next policy meeting in April. Citi economists Kit Wei Zheng and Ang Kai Wei said that “MAS’s less dovish tone” suggests that downside risks to its October core forecasts “have been significantly reduced, thus lowering risks of another downward re-centring in April”.

But Mr Tan sees the risks "as being tilted marginally toward a tightening of FX policy, especially if there is widespread distribution of Covid-19 vaccines, not just in Singapore but globally, ahead of the next policy review".