Supplementary Budget? Economists look to more policy moves to mitigate Singapore inflation

THE upward creep of core inflation might prompt Singapore to step in with both fiscal and monetary policy measures, economists said on Monday (May 23), as they warned of the risk that consumer prices could bust the upper end of official forecasts in 2022.

Household necessities such as food and electricity are driving up the cost of living, as core inflation – which excludes accommodation and private transport costs – jumped to 3.3 per cent in April, up from 2.9 per cent in March. While below the median estimate of 3.4 per cent in a private Bloomberg poll, core inflation is still at its highest level since early 2012.

Meanwhile, headline inflation stayed high at 5.4 per cent – unchanged from the month before – as the inflation in food, retail goods, and utilities was offset by a smaller increase in car prices.

And the inflationary pressures are expected to persist in the near term, no thanks to elevated the commodity prices, continued global logistics disruptions, and a tight manpower crunch. Prices of commodities such as crude oil and food are tipped to stay high in the near term, the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) warned.

As such, “more targeted fiscal measures may be forthcoming to assist lower-income households and vulnerable individuals with their cost of living issues”, said OCBC chief economist Selena Ling.

Chua Hak Bin and Lee Ju Ye of Maybank wrote in a note that “the government may have to provide a supplementary Budget to ease the burden” of rising food and utilities expenses.

“We think monetary policy may not be sufficient to contain the intensifying inflationary pressures, nor ease the tightness in the labour market,” they remarked.

HSBC economist Yun Liu added in a report: “Singapore still has the fiscal room to introduce additional relief measures, such as consumption vouchers and utility subsidies.”

ING senior economist Nicholas Mapa also told The Business Times: “With the MAS already tightening its stance and with the need to maintain export competitiveness, fiscal support would be a welcome development to deal with rising food and energy prices.”

But Denise Cheok, an economist who covers Singapore at Moody’s Analytics, said in an e-mail to BT: “As the high food and energy prices stem primarily from imported inflation, it would be more direct for MAS to step in to manage the rising pressures.”

That’s as the MAS is generally expected to continue tightening monetary policy settings at its biannual review in October, by again steepening the slope of the policy band in which the Singapore dollar nominal effective exchange rate (S$NEER) is allowed to move.

Surging food prices have driven the latest increase in inflation, with food costs up by 4.1 per cent year on year on higher costs of non-cooked items such as oils and fats; milk, cheese and eggs; meat; and fish and seafood. Costs are also being passed through to food services, as the cost of hawker fare rose by 4.2 per cent; restaurants, 3.8 per cent; and fast food, 3.1 per cent.

Electricity and gas prices were also up sharply by 19.7 per cent, on higher household tariffs, while inflation in retail and other goods picked up to 1.6 per cent, from 0.4 per cent in March.

Otherwise, costs in segments such as accommodation, private transport and services “continue to build in the pipeline”, said Ling, citing factors such as higher Certificate of Entitlement premiums and pump prices, as well as surge pricing for private hire cars.

Private transport expenses were higher by 18.3 per cent in April, while accommodation costs increased by 3.9 per cent year on year, with the MAS and MTI noting in their latest joint outlook statement that inflation in these categories is “expected to stay firm in the near term”.

Meanwhile, the MAS and MTI reiterated that core inflation will be “significantly above its historical average through the year” and could continue to rise “in the coming months”, although headline inflation should pick up by more than core inflation on transport and housing costs.

Said Cheok: “We don’t foresee core inflation overtaking headline inflation, because this would require transport and accommodation prices – which are not included in core inflation – to decline enough to offset the rise in food and energy prices.”

All the same, economists at both Maybank and OCBC expect headline inflation to remain above the 5 per cent mark for at least the rest of the quarter, with Ling adding that “core CPI is likely to breach the 4 per cent year-on-year handle from June onwards”.

“The acceleration of core inflation also implies that the initial energy price shock is feeding through to the rest of the basket,” Mapa told BT. “This implies that price pressures could become more pervasive, and elevated inflation could be around for the near term.”

The official forecast is for core inflation of 2.5 per cent to 3.5 per cent and headline inflation of 4.5 per cent to 5.5 per cent in 2022, but Ling said there are “still distinct upside risks” amid a host of reasons, such as the Russian invasion of Ukraine and Covid-19 lockdowns in China.

Citi analysts Kit Wei Zheng and Jester Koh suggested that core inflation could peak in the third quarter “at a slightly higher level than MAS’s expectations” and ease less than expected.

In the longer run, Kit and Koh projected that core inflation could average more than 2 per cent in 2023 and 2024, as the impact of higher wages on business costs “may not be fully offset by increase in productivity growth” – even in the absence of imported price shocks.