Economists expect unchanged monetary policy despite September’s headline inflation edging up

ECONOMISTS expect the Monetary Authority of Singapore (MAS) to stand pat at its next monetary policy review in January 2024 – the first in its new quarterly schedule – after Singapore’s headline inflation reversed from four months of declines to nudge up in September, and core inflation eased to an 18-month low.

Headline inflation for the month grew to 4.1 per cent on year from August’s 4 per cent, data from MAS and the Ministry of Trade and Industry (MTI) showed on Monday (Oct 23). This was a tick higher than the 4 per cent median forecast by private-sector economists in a Bloomberg poll.

The print reflected a pickup in private transport inflation, which more than offset the decline in core and accommodation inflation.

Core inflation, which excludes accommodation and private transport, dropped to 3 per cent year on year in September – down from 3.4 per cent in the preceding month and a touch lower than the economists’ 3.1 per cent median estimate. This was on account of lower inflation for food, as well as retail and other goods.

Though MAS kept its monetary policy stance unchanged in 2023, the trade-weighted Singapore dollar nominal effective exchange rate (S$NEER) nevertheless continued to trade near the upper end of the band, which should help to continue to contain imported cost pressures in the months and quarters ahead, said OCBC chief economist Selena Ling.

The bank raised its 2023 full-year headline inflation forecast to 4.8 per cent, from 4.5 per cent, in anticipation of elevated certificate of entitlement (COE) premiums sustaining for the rest of this year.

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“Inflation dynamics are still in a state of flux, given the latest developments in the Middle East which adds increased uncertainty to the energy price complex,” she said.

Policy-induced supply shocks by the Organisation of the Petroleum Exporting Countries and its allies could also drive oil prices up, added RHB acting group chief economist Barnabas Gan. Food prices are also anticipated to climb in the next six to 12 months, following the elevated El Nino conditions, he said.

But he maintained that with policy parameters again unchanged in October 2023, MAS has likely seen the end of its tightening cycle, after five consecutive moves since October 2021.

Similarly, Ling noted that, with the core inflation “well-behaved” and easing as expected, “what is currently driving headline CPI (consumer price index) higher in the near-term may not move the needle from the monetary policy perspective”.

Barclays senior regional economist Brian Tan said “relatively elevated” core inflation in 2024 will largely be held up by January 2024’s second goods and services tax (GST) hike. MAS will likely “look through such administered price adjustments in 2024”, he added, noting the central bank did not tighten monetary policy further in 2023 despite the first GST hike.

“With economic growth, and thus the output gap, likely to remain subpar next year as well... MAS is unlikely to resume tightening,” he said.

In addition to energy and food factors, Nomura economists Euben Paracuelles and Charnon Boonnuch flagged that domestic labour tightness has persisted and resulted in more wage inflation, posing a rising upside risk to its 2024 inflation forecasts.

However, UOB senior economist Alvin Liew and associate economist Jester Koh noted that while the latest CPI report continues to emphasise that “unit labour costs are expected to rise at a slower pace alongside the gradually cooling labour market”, the qualifier “next year” was dropped compared to MAS’ October monetary policy statement.

This implies that the easing of labour market tightness may happen sooner rather than later, they said. UOB’s view remains that MAS would keep its policy settings in January, instead expecting a slight reduction in the slope of the S$NEER in April next year.

In their inflation outlook, the authorities reiterated that a further step-down of core inflation to between 2.5 per cent and 3 per cent year on year by this December is expected, notwithstanding some monthly volatility from electricity and gas prices. Core inflation is projected to come in at around 4 per cent in 2023, while headline inflation should average around 5 per cent.

They expect core inflation to broadly moderate over 2024, with declining import cost pressures and continued easing in domestic labour market tightness. Though higher COE premiums are expected to continue leading headline inflation higher in coming months, private transport inflation should slowly moderate over the course of 2024 on increased COE quotas. Meanwhile, accommodation inflation should ease on increased housing supply. (See *Amendment note)

On a month-on-month basis, headline inflation was up 0.5 per cent in September, on the back of higher private transport costs. Core inflation inched up 0.1 per cent, largely due to a hike in costs of services and food.

Key CPI categories

Although headline inflation rose in September, on the year, lower inflation was recorded for three out of the six key CPI categories. Private transport was the only category to reflect a hike in inflation.

Electricity and gas costs fell at the same rate as in the previous month, as a smaller decline in electricity prices was broadly offset by a steeper fall in gas prices. Services inflation was also unchanged, as a larger increase in the cost of telecommunication services was offset by a smaller pickup in holiday expenses.

All other categories experienced falls in inflation.

Accommodation inflation edged down to as the pace of increase in housing rents moderated. Retail and other goods inflation slowed as the prices of personal care and medical goods registered smaller increases, while the costs of clothing and footwear and personal effects fell. Food inflation dipped as the prices of non-cooked food and prepared meals rose at a slower pace.

*Amendment note: An earlier version of the story noted easing private transport inflation and accommodation inflation in relation to moderating core inflation in 2024. The article has been revised to reflect that these categories are excluded from core inflation.  The inflation line graph, which incorrectly plotted several historical figures, has also been corrected.