Even as Singapore’s inflation cools, bringing it all the way back down will be tough

THOUGH inflation in Singapore has slowed in the past year and is expected to cool further in 2024, getting it back to historical levels will be tough, said economists.

This is even as headline inflation cooled to 3.7 per cent in December, having trended down from a high of 7.5 per cent in August 2022.

The Monetary Authority of Singapore (MAS) deems current monetary policy settings “appropriate” and opted to stand pat on Monday (Jan 29) at the first review of its new quarterly schedule.

Still, economists believe that inflation will be hard to tame, with a series of official price hikes in the first half of this year on top of enduring external risks and domestic wage pressures.

“The disinflation trend should continue in 2024, but the last mile looks stickier than expected,” said HSBC Asean economist Yun Liu.

A tough last mile

Central banks worldwide have managed to slow inflation, but face the challenge of bringing rates all the way down to their targets: the so-called “last mile of disinflation”.

In a Jan 15 report, DBS chief economist Taimur Baig gave several reasons that this global journey may be bumpy. Goods prices have been subtracting from inflation, but there is not much room left for this to continue. Meanwhile, services disinflation “can only take hold if job losses mount”.

Moody’s Analytics economist Denise Cheok noted that Singapore’s situation is slightly different due to its monetary policy mechanism. In the US, the Federal Reserve has to tighten interest rates to bring the core personal consumption expenditures price index back to its 2 per cent target, while ensuring a soft landing for the economy.

In Singapore, MAS has responded to high inflation by tightening exchange rate settings, allowing for a stronger Singapore dollar to mitigate imported inflation, she noted. “Since this acts through the exchange rate, rather than interest rates, it does not directly squeeze households through higher borrowing costs.”

“MAS acting to quell this ‘last mile of disinflation’ does not then have quite the same impact on unemployment, compared to what we see in economies with a traditional interest rate regime, such as the US,” she added.

Instead, Singapore’s main last-mile risks are supply-side shocks. These could take the form of higher energy prices or higher freight costs, said Cheok.

Dr Baig similarly identified upward pressures as obstacles to global disinflation. Shipping and insurance costs are key risks in the near term around Red Sea tensions, and food inflation may become a “perennial risk” around climate change and wars, he said.

First-half hikes

In Singapore, both headline and core inflation were falling over much of 2023. Headline inflation averaged 4.8 per cent in 2023, down from 6.1 per cent in 2022.

Core inflation – which excludes private transport and accommodation – inched up to 4.2 per cent for the full year, from 4.1 per cent in 2022. Still, it has been trending downward and ended at 3.3 per cent in December, from a high of 5.5 per cent in early 2023.

Yet Maybank senior economist Chua Hak Bin expects this disinflation process to “pause” in H1, amid a series of price hikes, including the goods and services tax (GST) rising to 9 per cent.

“The hike in GST, carbon taxes, property taxes and other administrative prices – including water and public transport – will likely keep core inflation pressures elevated,” he told The Business Times.

The five-fold jump in carbon tax to S$25 per tonne of emissions, starting this year, has already led to an increase in electricity and gas tariffs in the first quarter, ANZ head of Asia research Khoon Goh noted.

DBS economist Chua Han Teng added that by the end of 2023, the “favourable” base effect of previously high prices had “largely run its course”.

The official forecast range for core inflation in 2024 is 2.5 to 3.5 per cent, still above the threshold of “just under 2 per cent” that MAS sees as consistent with overall price stability.

Domestic price pressures may make it hard to close this final gap.

Maybank’s Chua sees inflation as mainly domestic-driven this year, as multiple government policies compound wage cost pressures for firms.

“Wage costs are rising because of a tight labour market, higher CPF (Central Provident Fund) salary ceiling, higher qualifying salaries for S-pass holders and the steady rollout of the Progressive Wage Model,” he said.

“There will likely be higher pass-through from surging wage costs to consumer prices in a slow growth economy.”

The tight labour market was also flagged by HSBC’s Liu. The biggest upside risk to her initial core inflation forecast is services inflation, as labour market tightness continues to support consumption.