Singapore inflation rises to 0.6% in June, in line with expectations

HEADLINE inflation growth came in higher in June, mainly on increasing food and services prices, according to the Department of Statistics on Monday.

The consumer price index (CPI) rose by 0.6 per cent on the previous year - up from a gain of 0.4 per cent the month before - and in line with analyst expectations, as polled by Bloomberg.

Core inflation, which leaves out accommodation and private road transport costs, also grew at a faster clip. It came in 1.7 per cent higher on the previous year, bucking the consensus forecast that it would keep at the 1.5 per cent increase posted in May. This key indicator is taken into account in monetary policy from the Monetary Authority of Singapore (MAS).

The MAS and the Ministry of Trade and Industry (MTI) in a joint statement reiterated their inflation outlook of the previous month. Imported inflation "is likely to rise mildly" on a global oil price rally and strengthening demand for food commodities, they remarked, while domestic sources of inflation are expected to grow alongside higher domestic demand and a faster rise in wages.

"However, the extent of consumer price increases will remain moderate, as retail rents have stayed relatively subdued and firms' pricing power may be constrained by market competition," they said.

United Overseas Bank (UOB) economist Francis Tan remarked: "What this means is that with Brent crude oil prices moving higher, the risk is biased towards higher, rather than lower, inflationary environment in Singapore in the months ahead. Cost-pushed type of inflation, rather than a demand-pulled type of inflation, due to higher international oil prices will only mean lower purchasing power for Singaporeans.

"That said, although crude oil prices are higher this year compared to last year, we do not expect them to be substantially higher as they will likely trend in the US$70 to US$80 range over the next four quarters."

Core inflation is still expected to rise gradually over the course of 2018, averaging in the upper half of the 1 to 2 per cent forecast range, while headline inflation is projected to come in within the upper half of its zero to 1 per cent forecast range for the full year - unchanged from the previous month's outlook.

Khoon Goh, head of Asia research for ANZ, said: "Given that core inflation has averaged 1.5 per cent over the first half of this year, this means the MAS expects core inflation to pick up towards 2 per cent year-on-year later in the year.

"Based on domestic developments, a further modest tightening in October cannot be ruled out, though this will depend largely on how the external environment evolves."

The central bank had moved to tighten policy in April 2018, allowing "modest and gradual" appreciation in the Singdollar.

Referring to the rise in core inflation, Mr Goh added: "This is a further sign that improving growth is starting to filter through into price pressures, though it is still modest at this stage."

Selena Ling, head of treasury research and strategy for OCBC Bank, said that core inflation could cross the 2 per cent mark for year-on-year growth "as early as August".

She noted that the acceleration in the second half of the year could come from not just higher oil prices but also a smaller decline in housing costs, an increase in education and recreation costs over the previous year's low base, and tighter labour market that could support domestic demand.

"This means that a further monetary policy tightening at the October Monetary Policy Statement cannot be ruled out yet, notwithstanding the deteriorating external trade environment," Ms Ling also said.

But UOB's Mr Tan predicted that the MAS will maintain its stance from April, citing "inflation expectations remaining stable and ongoing trade tensions potentially slowing down global economic growth in the months ahead".

For the June CPI, faster growth in non-cooked food item prices more than offset a slower increase in prepared meal costs, the MAS and MTI noted. The rise pushed food inflation up by 1.5 per cent in June, from 1.3 per cent in May.

Meanwhile, services inflation came in at 1.7 per cent for June, a hair's breadth above the 1.6 per cent gain in the previous month, which the MAS and the MTI attributed to a stronger pickup in holiday expenses, as well as an increase in telecommunications services fees against a decline in May 2017.

Retail item prices grew by 1.6 per cent - above the previous month's 1.3 per cent rise - with price increases for clothing and footwear, and medical products, appliances and equipment.

Private road transport inflation also edged up, with costs rising by 0.4 per cent in June against the 0.1 per cent increase the month before, on faster growth in petrol prices, and compared with a smaller year-ago decline in car prices.

But the drop in housing costs continued to ease with a 3 per cent decrease, down from the previous month's 3.2 per cent fall, which was attributed to a more gradual decline in rents.

Jameel Ahmad, global head of currency strategy and market research at currency broker FXTM, said: "The increase in inflationary pressures in Singapore last month could possibly be linked to higher import prices, as a result of the strength in the US dollar over the past couple of months.

"We appear to have seen a trend in the region where other markets are beginning to encounter higher inflationary pressures following currency weakness, and it wouldn't be a surprise to learn that this has also impacted Singapore."

Economist Tan Khay Boon, senior lecturer at SIM Global Education, noted: "The higher inflation rate in June 2018 implies that there has been greater living cost pressure on average households as the inflation was due to higher prices on food and services, as well as more expensive healthcare and education. While the cooling measures in the property market may exert downward pressure on imputed rent and transport costs, the higher oil prices will continue to increase utility costs.

"The weaker Singapore dollar may also increase import costs, which will fuel imported inflation further."

Amendment note: An earlier version of this article incorrectly stated at one point that housing costs increased in June. The cost of accommodation in fact decreased. The article above has been revised to reflect this.