Spike in Singapore inflation not yet cause for alarm; MAS unlikely to normalise currency settings before next year: analysts

CONSUMER prices spiked in May, with all-items inflation at its highest point since end-2013, according to official figures released on Wednesday.

Still, watchers stressed that core inflation - which strips out private road transport and accommodation costs - is still at manageable levels.

"I don't think inflation is a cause of concern just yet, nor it's likely to be anytime in the foreseeable future," Prakash Sakpal, senior economist for Asia at ING, told The Business Times.

Therefore, the Monetary Authority of Singapore (MAS) is still widely expected to hold off on monetary policy normalisation until next April - leaving currency settings untouched in the interim at its October review.

Headline inflation was 2.4 per cent in May, against 2.1 per cent in the month prior, while core inflation crept to 0.8 per cent, up from 0.6 per cent.

But the increases were due in part to a year-ago low base, when Singapore was in a quasi-lockdown, the MAS and Ministry of Trade and Industry (MTI) said in a joint statement.

Besides the low base effect, Mr Sakpal attributed the jump in consumer prices to supply-side factors, such as the oil price, while "the demand side pressure remains muted amidst resurgent Covid-19 spread" in Singapore.

Still, inflation will likely peak in July - at about 3 per cent for all-items prices and 1.3 per cent for inflation, according to Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye.

The duo have bumped up their full-year forecasts. Core inflation is now tipped to hit one per cent in 2021 - against an earlier estimate of 0.9 per cent - then touch 1.4 per cent in 2022.

Barnabas Gan, economist at UOB, added: "Singapore saw a persistent deflation environment in the period between April and Nov 2020, on the back of a relatively weaker economic environment and low oil prices then.

"As such, the rise of consumer prices may continue to be observed in the months ahead, although it is expected to be transitory when the base effects eventually dissipate."

In the meantime, Oxford Economics analyst Jung Sung Eun told BT: "More than three-quarters of the rise in inflation is coming from the transport component alone. While this will push up headline inflation, MAS core inflation lies well below 2 per cent."

Higher oil prices fuelled a rise in petrol costs, which drove private road transport inflation to 14.5 per cent in May. Meanwhile, accommodation costs ticked up by 0.9 per cent, on a faster increase in housing rents.

Services inflation came in at 1.4 per cent, on cost increases for telecom services, point-to-point transport and health insurance.

"On the flip side, the absence of tourism-led demand continued to pressure retail prices lower. Prices related to consumer goods were generally weaker," Mr Gan observed.

The cost of retail and other goods slipped 0.8 per cent year on year in May, as a 4.1 per cent fall in the price of clothes and shoes offset the 2.4 per cent increase in household durables.

To be sure, HSBC economist Yun Liu warned that "a rapid increase in accommodation costs" may reflect "surging property prices" in the market.

"MAS normalisation is unlikely this year, but it may opt to consider macroprudential tightening to curb price growth," she wrote in a report.

Wages are also set to go up in the coming year, noted Dr Chua and Ms Lee. They cited structural changes such as a tighter supply of foreign labour, and the expansion of Progressive Wage Model salary floors to the retail and food and beverage sectors.

Still, the MAS and MTI maintained their full-year forecast for core inflation to average zero to 1 per cent, with headline inflation to fall between 0.5 per cent and 1.5 per cent.

They reiterated that core inflation "will continue to gradually increase", while all-items inflation should ease in the second half of the year.