Singapore inflation marginally higher than expected in September; core at 2.8%, headline at 2%

ECONOMISTS remain mixed on the timing of monetary policy easing next year, after Singapore’s core and headline inflation came in a tad higher than expected in September.

Year on year (yoy), September’s core inflation, which excludes accommodation and private transport, was 2.8 per cent, data from the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) showed on Wednesday (Oct 23).

This was on account of an increase in retail and other goods inflation. It was a touch higher than August’s 2.7 per cent, and the 2.7 per cent median forecast in a Bloomberg poll of private-sector economists.

But Standard Chartered economist Jonathan Koh and Barclays senior regional economist Brian Tan both flagged that the rise was largely due to rounding. On an unrounded basis, there was only a 0.02 percentage point difference between yoy core inflation of 2.75 per cent in September and 2.73 per cent in August.

Meanwhile, headline inflation eased to 2 per cent from 2.2 per cent in August, mainly driven by a steeper fall in private transport costs, which more than offset the increase in core inflation. But it was still slightly above economists’ median estimate of 1.9 per cent.

On a month-on-month basis, the overall consumer price index (CPI) was up 0.3 per cent in September, while core CPI edged up 0.1 per cent.

Some outlook shifts

Reiterating their expectations from the October monetary policy statement (MPS), MAS and MTI maintained that core inflation should come in between 2.5 and 3 per cent for the full year, while headline inflation should average around 2.5 per cent. For 2025, they also project both measures to average 1.5 to 2.5 per cent.

For the nearer term, they repeated that core inflation is expected to stay on a gradual moderating trend and reach around 2 per cent by end-2024 – but Maybank analysts Chua Hak Bin and Brian Lee said this guidance “looks ambitious”. They still believe that core inflation may end the year at around 2.5 per cent instead.

“Core inflation has been sticky over the last two months and drifting higher since July,” they pointed out. Core inflation was 2.5 per cent in July.

Recent hikes in local qualifying salaries in July 2024 may be adding to wage cost and price pressures, the duo said. They also noted that a strengthening economy, amid a tight labour market, may mean inflation will remain stubborn.

“Firms will have to grapple with more policy-induced cost increases in the months ahead, particularly on the manpower front,” the analysts added.

But on domestic unit labour costs, the latest report echoed the October MPS in noting that they should rise more gradually alongside moderating nominal wage growth and improving productivity. “The pass-through of earlier increases in labour costs to consumer prices has largely peaked and is expected to continue at a reduced pace,” said the report.

UOB associate economist Jester Koh believes that the “diminishing pass-through of wage pressures into services inflation could materialise”. This is “on the basis that any rise in nominal wages could be offset by the ongoing cyclical pickup in labour productivity, with tailwinds from the adoption of generative AI (artificial intelligence)-related applications to reduce manual work and enhance business process efficiencies”.

Despite the upward movements in core inflation during the third quarter of 2024, DBS economist Chua Han Teng thinks the underlying disinflation trend remains intact for the remainder of 2024.

UOB’s Koh agreed: “Despite the stronger-than-expected core inflation outturn, the disinflation progress remains intact, as evidenced by the slowing of its sequential momentum, although the recent uptick in food inflation momentum warrants close monitoring.”

Maybank’s base case remains for MAS to ease monetary policy via a slight reduction of the S$NEER slope in January 2025, though it added that a later April easing is possible, “especially if core inflation remains sticky and/or gross domestic product growth remains strong”.

Similarly, UOB’s Koh said that with the output gap likely closing or even turning positive in the second half of 2024, in tandem with robust economic activity, demand-side inflationary risks persist.

MAS may therefore adopt a more cautious approach and commence policy normalisation only when yoy core inflation is very close to desired levels, at about 1.8 per cent, and possibly when goods and services tax effects have completely washed out, he said. The bank’s base case calls for a slight slope reduction in the January or April 2025 MPS.

In contrast, Standard Chartered maintained its call of a status quo decision in January; RHB expects MAS to keep its policy parameters unchanged for at least the first half of 2025; and Bank of America’s base case is for MAS to stay on an extended pause, though it added that a move could happen in April 2025 if clear downside growth risks emerge.

Similar to the October MPS, which said that risks to the inflation outlook “are more balanced compared to three months ago”, MAS and MTI said on Wednesday that risks are “relatively balanced”.

“Domestically, stronger-than-expected labour market conditions could lead to a slower easing in unit labour cost growth,” they said. “An intensification of geopolitical tensions may lead to higher commodity prices and add to imported costs...

“Conversely, a significant downturn in the global economy could induce a greater easing of cost and price pressures, causing domestic inflation to come in materially lower than expected.”

Key CPI categories

In line with the weaker headline inflation in September, lower inflation was recorded for the majority of categories.

Accommodation inflation eased to 2.7 per cent in September, from August’s 2.9 per cent, on account of a smaller increase in housing rents. 

On the bread-and-butter front, food inflation inched down to 2.6 per cent, from 2.7 per cent previously, as food services prices rose at a slower pace.

Electricity and gas inflation also moderated to 6.3 per cent in September, from 6.6 per cent in the preceding month, as electricity prices rose at a slower pace. Maybank’s team expects utilities inflation to fall further in Q4 as SP Group and City Energy lower electricity and gas tariffs, due to lower energy and fuel costs.

Meanwhile, services inflation was unchanged at 3.3 per cent, as a fall in telecommunications services fees was broadly offset by a larger increase in tuition and other fees, holiday expenses and health insurance costs.  

Private transport costs fell at a steeper pace of -2.4 per cent in September, against August’s milder -1 per cent. This was due to a larger decline in car prices – which Maybank analysts attributed to lower Certificate of Entitlement premiums, versus a year ago – alongside softer petrol prices.

Retail and other goods was the only category to post higher yoy inflation in September compared with August. Inflation in this category picked up to 0.8 per cent, from 0.4 per cent before, due to a smaller decline in clothing and footwear prices.