Singapore's headline inflation inches up in March, core inflation eases marginally

SINGAPORE'S headline inflation inched up in March, though core inflation eased marginally, according to consumer price index (CPI) figures released by the Department of Statistics on Tuesday.

Core inflation, which strips out housing and private transport costs, was 1.4 per cent in March, easing slightly from 1.5 per cent in February and lower than economists' forecasts of 1.7 per cent.

But with more modest declines in private road transport and accommodation costs compared to a year ago, headline inflation was 0.6 per cent in March, up from 0.5 per cent in February - though still below economists' expectations of 0.7 per cent.

The easing in core inflation came as higher services and food inflation was more than offset by smaller increases in the cost of retail items and electricity and gas.

Food inflation was 1.6 per cent in March, up from 1.4 per cent in February, with prices of prepared meals and non-cooked food items rising faster. Services inflation was 1.7 per cent in March, up from 1.5 per cent in February, due mainly to higher inflation for holiday expenses and a smaller decline in telecommunication services fees.

In contrast, retail costs inched up just 0.1 per cent year on year in March, down from February's 1.1 per cent rise. Electricity and gas costs rose 3.9 per cent, down from 5.5 per cent the previous month.

While private road transport costs continued to fall, the decrease was a gentler 0.9 per cent year on year in March, compared to February's 2.3 per cent drop. This was due to a more gradual decline in car prices, and also a rise in petrol prices in March, compared to February's decline.

Accommodation costs also fell at a more moderate pace of 1.4 per cent in March, compared to February's 1.6 per cent decline, as the fall in housing rentals eased.

External sources of inflation are likely to be benign in 2019, with global oil prices expected to be lower than the year before and food prices picking up only slightly on average, said the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry.

Domestically, labour market conditions remain firm and will support moderate wage increases, they said. But inflationary pressures are unlikely to accelerate, given slower economic growth, global uncertainty and the continued restraining effects of MAS's monetary policy tightening in 2018.

Core inflation for the year is likely to come in near the mid-point of the official forecast range of 1 to 2 per cent. Headline inflation is expected to average 0.5 to 1.5 per cent, with private road transport costs expected to be largely unchanged from 2018 and accommodation costs likely to decline at a slower pace this year.

The latest figures cement economists' expectations that the central bank will not tighten monetary policy further at its next half-yearly meeting in October.

Barclays economist Brian Tan expects core inflation to average 1.5 per cent for the full year, in line with the official forecast, adding: "As we do not expect the dark clouds looming over the economic outlook to clear this year, our base case is for the MAS to leave its foreign exchange policy settings unchanged at its October meeting."

ANZ head of Asia research Khoon Goh noted that "the usual post Chinese New Year bounce failed to materialise" in several CPI components. The open electricity market's dampening effect on electricity prices was also larger than expected, he added. ANZ's estimate is that this electricity market liberalisation alone is responsible for pushing down core inflation by 0.2 percentage point. With the last zone of the open electricity market to be covered from May 1, further declines in electricity prices are ahead.

"Despite still firm labour market conditions and the recent run-up in oil prices, there is little likelihood of the MAS core inflation pushing higher anytime soon," he said, expecting core inflation to edge slightly lower in the coming months and remain comfortably within the forecast range.

With the latest figures, UOB has downgraded its headline inflation target to 1 per cent, down from 1.2 per cent previously, though keeping its core inflation outlook unchanged at 1.5 per cent.

However, Citi economists Kit Wei Zheng and Ang Kai Wei said it was premature to conclude that monetary policy has taken a dovish turn. This is given the accommodative policy stance, a positive output gap, possible green shoots in leading indicators, rising oil prices, and MAS's "strong focus on underlying cost pressures", they said.