Commodity price shock is inevitable but Singapore’s response is prudent

ENERGY inflation is clear and present in the minds of consumers, market participants and policymakers around the world.

Stories abound about spikes in pump prices, energy rationing to counter runs on supplies, public sector austerity measures, and curtailment of services.

There is a gradual broadening of the crisis as price pressures move downstream. Petrol and diesel dominate the headlines, but the really striking case is jet fuel, prices of which have soared to levels higher than even the early days of the 2022 Russian invasion of Ukraine.

As production processes rely heavily on petroleum products and natural gas, prices of chemicals, plastics, and fertiliser have jumped 20 to 70 per cent.

The impact on the travel industry, from flight availability to airfares, is evident already. We’re afraid that agriculture and manufacturing might follow.

With major global shipping services providers adding fuel surcharges of close to 30 per cent in recent weeks, the cost is likely to feed into an already overheated electronics supply chain.

Months before the war began, producers were warning about the artificial intelligence (AI) cycle’s pull on a wide range of electronics products.

From memory chips to central processing units, microcontrollers to sensors, circuit boards to copper cladding, prices have been surging due to strong demand, constrained supply capacity, and rising cost of metals and processing. Current conditions would surely add to this dynamic.

Such shocks permeate through Singapore’s economy readily.

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Petrol prices may get adjusted immediately, electricity and electronics prices may rise with some lag, but it is just a matter of when, not if; higher inflation in the near term appears to be unavoidable.

Two important matters must be considered in this context.

First, even at the present, elevated levels, global oil prices, when adjusted for inflation, are 50 per cent below their all-time high. The global economy has taken energy shocks and a rise in broader prices in its stride in the past; it can do so again.

In our view, the absorptive capacity is greater than ever. Thanks to technological advances, the energy intensity of production has declined, while a green energy ecosystem built around electric vehicles, batteries, solar panels, and wind turbines has become a real value proposition.

Moreover, informed by previous crises, strategic reserves of food and fuel have deepened, and supply chains have become more diversified, and therefore more resilient.

During 2022 to 2024, the global economy experienced substantially above-trend inflation, ranging from 5 to 8 per cent, and yet managed to grow at around 3.5 per cent annually on average.

During that phase, demand destruction was limited as jobs were plentiful and income growth was strong.

Currently, optimism about jobs may be waning due to the AI wave, but the same wave is creating strong tailwinds for those in the technology ecosystem, buoying production and trade.

Without downplaying the financial burden of higher prices on households and firms, one can be somewhat constructive about demand due to the presence of mitigating factors such as the robustness of the electronics cycle.

Even as monetary policy was tightened to counter inflation during 2022-2024, fiscal policy was largely accommodating, supporting demand.

This time round, many countries may not be able to provide as much fiscal support as they did back then, owing to large public debt burdens. Thankfully, Singapore stands as a strong exception to such constraints.

Decades of empirical evidence is available to those looking for policy prescription during times of commodity price shocks.

Product pricing must be transparent, support should be targeted, and measures ought to be communicated clearly. Not all bullets should be deployed at once; space must be provided for economic agents to adjust to the new reality, be it higher prices or constrained supply.

Given such considerations, we find Singapore’s measured public sector response to the ongoing crisis to be in line with best practice.

Preventing price signals from permeating through the economy via across-the-board subsidies and price controls is not advisable, as they prevent necessary economic adjustments and distort incentives.

Instead, the authorities have said that the nation has ample reserves to ensure an unimpeded supply of energy domestically and sufficient financial buffers to procure what’s needed externally. Concurrently, they have cautioned about higher prices in the pipeline.

The government has also deployed nearly S$1 billion in fiscal support measures under a three-pronged approach. We view them as well-calibrated and targeted at exposed groups while keeping the powder dry.

First, relief is provided to the land transport sector, which has borne the brunt of the fuel price spikes. Measures include cash aid for taxi and platform drivers and workers, alongside time-bound government funding for essential bus services to cope with higher operating costs.

Second, support for businesses balances short and long-term imperatives. While an enhanced corporate income tax rebate will ease firms’ near-term cash-flow pressures, the expansion and extension of the Energy Efficiency Grant, together with sharing of cost increases for critical government projects, signal a continued commitment to green and infrastructure-enhancing goals.

Third, higher disbursement of the Budget 2026 Cost-of-Living Special Payment, alongside the front-loading of CDC vouchers to June 2026, will alleviate pressures for lower-income households, who face greater strains from rising essential prices, including electricity and gas, transport, and potentially food.

Beyond targeted fiscal policy, Singapore’s unique exchange rate-based monetary policy will also likely play a crucial role in containing imported inflation and anchoring inflation expectations.

We expect the Monetary Authority of Singapore to undertake a policy-induced appreciation of the Singapore dollar nominal effective exchange rate.

Informing the public about the risks to the outlook, from higher inflation to lower growth, while assuring them about the wherewithal to deal with likely contingencies strikes a balance between caution and resolve.

Global shocks inevitably hit Singapore; there is not much one can do about that.

Providing assurance to the society, through a combination of targeted support measures and signalling of the buffers available, is the prudent way to deal with increasingly frequent macroeconomic shocks.

Both writers are from DBS Bank. Taimur Baig, PhD, is chief economist and Chua Han Teng, CFA, is senior economist.