Singapore's core, headline inflation continue positive trend in April

SINGAPORE'S core inflation edged up to 0.6 per cent in April compared to the same period last year, a positive reading for the third consecutive month, the Department of Statistics' consumer price index (CPI) figures showed on Monday.

Core inflation, which excludes the cost of accommodation and private road transport, was 0.5 per cent in March and 0.2 per cent in February. April's headline inflation came in at 2.1 per cent, up from 1.3 per cent in March.

Analysts' and economists' responses varied on what the results would mean for their CPI forecasts, with some maintaining their estimates while others have shifted them to account for April's inflation rates.

Sentiments surrounding the possibility of policy adjustment in October also seemed mixed.

Increases in both core and headline inflation can be partially attributed to the low base in April last year, when prices fell sharply, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said in a joint statement. Smaller declines in the costs of electricity and gas and retail and other goods drove the increase in core inflation in April.

Higher energy costs led to upward revisions of electricity and gas tariffs, slowing the fall in electricity and gas prices.

UOB economist Barnabas Gan said that the absence of tourism-led demand continued to pressure retail prices lower, but the cost of retail and other goods also fell more gradually. Inflation for services and food bucked the trend. Services inflation eased as telecommunication services fees and health insurance inflation came in lower. Food inflation slowed to 1 per cent in April from 1.4 per cent in March, as non-cooked food inflation was lower.

The agencies said that the headline increase in April also came on the back of higher inflation for private transport and accommodation. In April 2020, private transport costs declined sharply due to the suspension of Electronic Road Pricing. Boosted by the low base, private transport inflation was 12.9 per cent this April, with car prices rising significantly.

Maybank Kim Eng analysts Chua Hak Bin and Lee Ju Ye noted in a report that private transport costs were at their highest since February 2013. Petrol costs surged, reflecting a petrol hike in place since this February, and COE premiums are climbing to multi-year highs, partly because of the reduction of the COE quota from May to July this year, the report said.

Accommodation inflation inched up from March as a result of stronger rises in housing rents.

"External inflation has risen amid the recovery in global oil prices and turnaround in producer price inflation in the major economies. While there are some upside risks, the upward pressure on global inflation should ease in the latter part of this year," said MAS and MTI.

The statement added that large increases in oil prices would likely be restricted by surplus oil production capacity, and import price pressures in Singapore would be moderated by negative output gaps in some of the country's major trading partners.

MAS and MTI expect that headline inflation in Singapore should remain stable in the near term and ease later in the year as base effects peter out. Core inflation will continue to rise, they said, although restrictions implemented under Phase 2 (Heightened Alert) are projected to dampen the pick-up in underlying inflation.

However, in headline inflation, private transport and accommodation costs are expected to remain resilient. Maybank KE analysts do not expect the impact on prices to be as significant as when "the whole world locked down and global demand collapsed" last year.

Although Singapore and a few Asean countries are locking down, the United States, United Kingdom and Europe are reopening, which could fan global commodity prices, they said. They believe that current restrictions may be sufficient to contain the spread of the virus.

"We think there is a non-negligible probability (of about 30 per cent) that the MAS may tighten at the October meeting if inflation overshoots and the Covid outbreak recedes, shifting to a 'slightly' gradual and modest appreciation stance," the report said.

On the other hand, Selena Ling, head of Treasury Research and Strategy at OCBC Bank, believes that "the status quo will be maintained" at the October monetary policy review. "The reiteration of muted wage growth expectations amid the current labour market slack, as well as subdued commercial rents amid the sluggish retail sector, are likely to continue to underpin the policymakers' comfort to look past the current headline inflation uptick without being pressured into premature policy recalibration," she said.

MAS and MTI are maintaining their full-year forecast ranges of zero to 1 per cent for core inflation, and 0.5 to 1.5 per cent for headline inflation. Maybank KE and OCBC have also maintained their CPI forecasts, which fall between the agencies' projected ranges.

But Bank of America (BofA) Global Research analyst Mohamed Faiz Nagutha said that core inflation missed expectations, which "mechanically lowers (its) 2021 trajectory significantly", bringing BofA core inflation projections "much closer to MAS' forecast as at end-April".