Singapore core inflation negative in February as services are hit by Covid-19

SINGAPORE'S core inflation turned negative in February for the first time in over a decade, due largely to a decline in the cost of services - chiefly airfares and holiday expenses - amid the Covid-19 outbreak, raising expectations of significant monetary easing by the Monetary Authority of Singapore (MAS) in its March 30 decision.

All-items or headline inflation was 0.3 per cent year on year, just under economists' expectations of 0.4 per cent and down from 0.8 per cent in January, according to the Department of Statistics consumer price index (CPI) figures on Monday.

But the MAS core inflation measure, which excludes accommodation and private road transport, was -0.1 per cent year-on-year, below economists' predictions of 0.1 per cent and down from 0.3 per cent in January.

The last time core inflation had been negative was January 2010, when it was -0.5 per cent.

In a joint statement, the MAS and the Ministry of Trade and Industry (MTI) said that they "will closely monitor price trends and assess the impact of the Covid‐19 outbreak on inflation".

They provided no updated forecast ranges for headline or core inflation, instead saying that these will be released in the MAS' upcoming Monetary Policy Statement, usually due in April but now scheduled to be out on March 30. The previous official forecast range for both core and headline inflation in 2020 was from 0.5 per cent to 1.5 per cent.

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Barclays economist Brian Tan sees the MAS as hinting at upcoming downgrades to its inflation forecasts. The Barclays forecast is for core inflation to be -0.1 per cent for the full year, and headline inflation to be -0.3 per cent.

In the upcoming monetary policy decision, he expects the MAS to not only flatten the slope of the Singapore dollar nominal effective exchange rate, but also re-centre it lower. There is also a risk that the band will be widened to accommodate financial market volatility, though Barclays' base case is for the width to be unchanged.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye have cut their inflation forecasts, expecting full-year headline and core inflation to both be 0.3 per cent. They expect the MAS to lower its ranges too, to between -0.5 per cent and 0.5 per cent.

"We expect to see inflation easing further in the coming months as the collapse in demand due to the Covid-19 will outweigh any price pressures from supply disruptions. A weakening labour market will also weigh on consumer sentiments," they said.

With the widening spread of Covid-19 and tighter containment measures, MTI could announce a growth forecast downgrade as well, said Citi economists Kit Wei Zheng and Ang Kai Wei. The gross domestic product forecast could be lowered to between -0.5 per cent and 0.5 per cent, which is the bottom half of the current forecast range. This would then require the level of the S$NEER to be lowered, they added.

OCBC Bank head of treasury research and strategy Selena Ling sees downside risk to both headline and core inflation for the next three to six months, making reference to the 2003 Sars outbreak "when consumer confidence tanked and public consumption declined", resulting in deflationary pressures for CPI components such as travel, food and beverages, and entertainment in particular.

OCBC has priced in a plausible domestic technical recession in the second quarter, and expects inflation readings in the second and third quarter to be in negative territory.

UOB economist Barnabas Gan sees the possibility of full-year deflation for 2020, and has downgraded his outlook for both headline and core inflation to -0.3 per cent.

Services inflation was -0.4 per cent in February, a drastic fall from January's 0.5 per cent, which was driven by a fall in airfares and holiday expenses. Food inflation edged down to 1.6 per cent, from 1.7 per cent previously.

Electricity and gas prices continued to fall, at -7.4 per cent, though this was a slower decrease than the -8.1 per cent in January. Retail and other goods saw costs fall 1 per cent, slowing from January's 1.4 per cent decline.

For the items excluded from core inflation, private transport inflation was 2.4 per cent, down from 4.6 per cent in January, due to a smaller rise in car and petrol prices. Accommodation costs rose 0.4 per cent, compared to 0.3 per cent in January, with a stronger pickup in housing rentals.

SIM Global Education senior lecturer Tan Khay Boon said that February's subdued inflation suggested "that the disruption in supply chain due to countries being locked down has not created a significant impact". But food inflation could edge upwards with panic buying and irrational hoarding, he added.

"In the quarters ahead, external sources of inflation are likely to remain benign, amid weak demand conditions and generally well‐supplied food and oil commodity markets," said the MAS and MTI, noting a sharp oil price decline in March.

"However, international measures to contain the Covid‐19 outbreak have led to supply chain disruptions, which could put some upward pressure on imported food prices," they noted.

With the Covid-19 outbreak hitting aviation and tourism, travel-related items in the CPI basket could see lower prices. Safe-distancing measures and the fall in tourist arrivals have dampened consumer demand, "and will cap any price increases for discretionary goods and services".

Labour market conditions will continue to soften and dampen wage growth this year, while economic uncertainty from the outbreak is also likely to discourage firms from passing on any cost increases to consumers, the agencies said.