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Singapore's headline inflation edges up in May, core inflation holds steady

The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry said external sources of inflation are likely to be benign for the rest of 2019, and global oil prices are expected to remain below 2018's average while food prices should pick up only slightly on average.

HIGHER private transport, retail and food inflation bumped Singapore's headline inflation higher to 0.9 per cent in May, outstripping economists' estimates of 0.6 per cent and rising from 0.8 per cent in April, according to consumer price index (CPI) figures released by the Department of Statistics on Monday.

However, despite the larger-than-expected increase in headline inflation, economists mostly expect the Monetary Authority of Singapore (MAS) to maintain its current monetary policy stance at its next half-yearly meeting in October, as they see signs of inflationary pressures easing.

A steep rise in car prices more than offset a smaller increase in petrol prices in May 2019. As a result, private road transport costs rose 1.5 per cent, up from a 1.1 per cent increase in April.

But accommodation costs fell one per cent year-on-year in May, slowing slightly from a 1.4 per cent drop in the previous month. This reflected a slower pace of decline in housing rentals and a stronger pick-up in the cost of housing maintenance and repairs.

Meanwhile, core inflation - which strips out housing and private transport costs - was 1.3 per cent, at the same pace as in April and in line with economists' forecasts. This came as higher retail and food inflation offset declines in electricity and gas costs.

Retail costs increased 0.5 per cent in May, compared with a 0.2 per cent rise in April, reflecting an upturn in personal effects prices and smaller declines in the costs of recreation and entertainment goods, clothing and footwear, and medical products, appliances and equipment. Food inflation edged up to 1.4 per cent from 1.3 per cent in the previous month on the back of a faster pace of increase in the prices of prepared meals.

In contrast, electricity and gas costs saw a steep decline of 4 per cent from a 2.8 per cent drop in April, as the phased nationwide launch of the Open Electricity Market continued to dampen electricity prices.

Services costs increased at 2 per cent in May, the same pace as in April.

The MAS and the Ministry of Trade and Industry (MTI) maintained their inflation outlook from the previous month. They said that external sources of inflation are likely to be benign for the rest of 2019, and global oil prices are expected to remain below 2018's average while food prices should pick up only slightly on average.

Labour market conditions remain firm domestically and will support moderate wage increases. However, inflationary pressures are unlikely to accelerate, amid slower economic growth, global uncertainty and the continued restraining effects of MAS's monetary policy tightening in 2018.

Core inflation for 2019 is expected to come in near the mid-point of the official forecast range of 1-2 per cent. Headline inflation is expected to average 0.5-1.5 per cent.

In a slight change from their outlook for previous months, MAS and MTI said that they expect that private road transport costs could pick up slightly this year as compared with 2018. Meanwhile, accommodation costs are still expected to decline at a slower pace this year.

Noting that the MAS kept its overall inflation view unchanged, HSBC economists Joseph Incalcaterra and Yun Liu said: "Ultimately, this tells us that the central bank will be focused on forward-looking growth and labour market data in the months ahead, and will look through the recent deceleration in core inflation."

Maybank economists Chua Hak Bin and Lee Ju Ye observed that headline inflation could be reaching its peak, even as private transport costs may continue to rise in coming months due to low base effects from 2018. The pace of increase could slow to less than one per cent following a peak in car prices in April/May, while the certificate of entitlement (COE) premium increase has already softened to 14 per cent with customers becoming more cautious in the uncertain economic climate, they said.

They maintain their 2019 forecast for headline inflation at 1.2 per cent and core inflation at 1.4 per cent.

ANZ head of Asia research Khoon Goh attributed the increase in headline inflation to the effects of service and conservancy charges rebates in April and a large increase in private transport costs in May, rather than a rise in inflationary pressures. In fact, he sees signs of those pressures easing, such as a recent decline in the ratio of job vacancies to unemployed persons and a fall in global oil prices compared to year-ago levels.

As a result, Mr Goh sees MAS staying put for now, but notes that it could tilt towards an easing if downside risks to Singapore's export and growth outlook worsen. "The extent of the downside growth risks would hinge on the outcome of the meeting between President Trump and President Xi at this week’s G-20 Osaka summit," he said.

OCBC economist Selena Ling expects dampened global growth prospects and US-China trade uncertainties to "keep even any potential hint of hawkish intentions under a lid for the interim".

"Moreover, given the recent dovish pivot by the US Federal Reserve, the European Central Bank and the Reserve Bank of Australia among others last week, the pendulum has swung clearer in favour of more rather than less monetary policy accommodation," she added.

The bank's full-year headline and core inflation forecasts remain at one per cent and 1.5 per cent year-on-year respectively, with Ms Ling adding that "domestic core inflationary pressures remain stable for now, and firm labour market conditions are not spilling over into untoward wage intentions."

UOB economist Barnabas Gan is keeping his outlook for headline and core inflation unchanged at one and 1.5 per cent respectively with downside risks, given the possibility of global oil prices remaining tame and inflationary pressures being restrained by the slowdown in overall domestic economic growth.

"Moreover, the mix of lower telecommunication prices owing to cheaper (and some free) mobile phone plans and cheaper electricity prices are key exogenous factors that could continue to pressure inflation pressures lower," he added. "Owing to the benign inflation outlook and headwinds to economic growth at this juncture, we keep to our call for the MAS to keep its policy parameters unchanged in its upcoming October MPS (monetary policy statement) meeting."

Barclays economist Brian Tan, who forecasts core inflation to average 1.5 per cent for 2019, sees room for the MAS to ease monetary policy at its next half-yearly meeting.

"With the economic growth outlook set to darken further this year, our base case is for the MAS to reduce the slope of its official S$NEER (Singapore dollar nominal effective exchange rate) policy band by 50 basis points to an estimated 0.5 per cent in October," he said.