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Analysts expect to see 'challenging' core inflation in 2023, further tightening cannot be 'ruled out'

Felicia Tan
Felicia Tan • 8 min read
Analysts expect to see 'challenging' core inflation in 2023, further tightening cannot be 'ruled out'
All the analysts have kept their 2023 CPI forecasts unchanged. Photo: Bloomberg
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Analysts are keeping their 2023 inflation forecasts the same as Singapore’s headline inflation for December 2022 eased while core inflation remained unchanged.

While headline inflation stood lower than Bloomberg’s forecast of 6.7%, core inflation stood slightly above the Bloomberg median estimate of 5.1%.

OCBC Bank’s chief economist & head of treasury research & strategy, Selena Ling, believes that core inflation will remain “challenging” in 2023 as core inflation stood unchanged for the third month running. In her statement on Jan 25, Ling attributes this to “domestic price pressure points” including the 1% increase in Singapore’s GST in January.

Wage inflation due to the still-tight labour market, food inflation, as well as local firms passing on higher cumulative costs to end-consumers are also factors contributing to the high core inflation.

“For the man on the street, while they have received additional assistance through the GST Assurance Package and the recent $300 CDC voucher per household, elevated inflation remains the pressing issue of the day,” Ling writes.

“Looking ahead, while many other economies may see a faster normalisation of inflationary pressures due to relatively stable energy prices and high base effects from last year, Singapore is likely to experience higher than normal headline and core inflation in 2023 as the inflation drivers have rotated from external to domestic price drivers,” she adds.

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In 2022, Singapore’s headline CPI stood at 6.1% y-o-y while core CPI came in at 4.0% y-o-y, higher than 2021’s print of 2.3% and 0.9% respectively.

To Ling, 2023’s figures are likely to stand closer to 2022’s figures as opposed to 2021’s.

“Our house forecast for 2023 headline and core CPI stand at 6.0% and 4.0% y-o-y respectively. However, for 1Q2023, headline and core may reaccelerate to 7.2% and 5.3% due to the above-mentioned factors before gradually easing in subsequent quarters,” she says.

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“This will put the spotlight on the upcoming 2023 Budget on Feb 14 for potential further fiscal assistance for vulnerable households and businesses in the current challenging economic environment,” she adds.

More tightening needed

RHB Group Research’s senior economist, Barnabas Gan, notes that market concerns over the rising inflation rates are now fading on the back of dissipating inflation risks as momentum slowed going into the end of 2022.

“For most key Asian economies, core inflation momentum has decelerated into end-2022 on the back of moderating commodity prices and easing supply chain congestions. Similarly, December’s US CPI on a month-on-month basis declined for the first time since May 2020, underlining that the inflation pace in the world’s largest economy is indeed decelerating,” Gan writes in his Jan 25 note.

As Singapore’s core inflation is expected to remain above the symbolic 2.0% handle from now to 1H2023, Gan is still of the view that the Monetary Authority of Singapore (MAS) may further tighten its monetary policy in April 2023.

Above from the sticky core inflation reading, Gan notes that the Singapore dollar nominal effective exchange rate (S$NEER) model suggests that it has remained above the mid-point since 2021 and has strengthened around 6.5% throughout 2022.

“Notwithstanding that relative weakness in the S$NEER at the time of writing (S$NEER is estimated at 0.66% above the midpoint, against 1.0% in 4Q2022), we think more appreciation headroom may be needed for a stronger Singapore dollar (SGD) in response to the current inflation environment,” he says.

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“Third, there remain upside risks to Singapore’s inflation outlook on the back of uncertainties surrounding global geopolitical tensions and pandemic-related risks. In addition, demand-pull inflation, alongside robust wage growth and a higher GST rate (8% effective Jan 1, from 7%), is expected to lift inflation pressures in 2023,” he adds.

Like OCBC’s Ling, Gan has kept his full-year forecasts for 2023’s headline and core inflation at 3.0% and 2.8% respectively.

“We recognise that the balance of risks is tilted to the upside as inflation prints have surprised higher, especially in 2H2022. This is compared to the official outlook for headline and core inflation at a range of 5.5% – 6.5% and 3.5% – 4.5%, respectively,” he says.

“For that matter, on the back of a potential MAS monetary policy tightening in April 2023, we think that both headline and core inflation will decelerate to their 3.0% and 2.0% handle by 4Q2023,” he adds. “The caveat to this view is centred on the uncertainties surrounding global geopolitical tensions and pandemic-related risks, which may re-elevate supply chain congestions should these exacerbate further.”

Pre-emptive off-cycle expected

Citi Research analyst Kit Wei Zheng notes that the outlook given by the MAS and the Ministry of Trade and Industry (MTI) was “broadly similar” to that of November’s but a “tad more hawkish” than that of MAS’s October monetary policy statement (MPS).

“Imported inflation is expected to remain “firm” (versus “significant” in November) amidst “elevated” (versus “firm” in November) commodity prices, and still tight labour markets in advanced economies,” says Kit.

“On the domestic front, utility costs are still expected to remain “elevated”, notwithstanding that electricity tariffs are seen to have peaked in 3Q2022. Firms are expected to continue passing through accumulated import, labour and other costs to consumer prices amid resilient demand, with car and accommodation cost increases still seen “firm”. Core inflation is still projected to stay “elevated” in the “first half of this year” (versus [the] “next few quarters” in November), before slowing discernibly in 2H2023,” he points out.

The statements are a “tad more hawkish” than the projections at the October MPS where the core was expected to stay “around 5% into early 2023,” adds Kit. “Projections for headline and core inflation (including and excluding the GST impact) were unchanged from last month and from the October MPS.”

In his report on Jan 25, Kit is leaning “marginally” towards the possibility of a pre-emptive late January off-cycle where there may be an upward re-centring of 100 basis points (bps).

“This would keep the neutral NEER path within the policy band through 2023 (assuming no further policy changes in 2023), with real policy settings staying tight in real terms,” he says.

Further to his report, Kit notes that there are several factors in favour of a pre-emptive tightening. This includes the continued tightness in the labour market, reduced downside growth risks and upside inflation risks from China’s reopening as well as “policymakers’ vigilance on profiteering and second round effects from the GST hike”.

However, the analyst is not writing off the possibility of a delayed tightening till April.

“[The] broadly in line 4Q2022 core and/or lower oil prices (vs MAS’s October assumption of US$95 ($124.83) per barrel) are deemed sufficient to reduce the urgency of an off-cycle move. Historically, off cycle moves were preceded by upside surprises of at least 40 bps – 50 bps in the preceding quarter,” he says.

“The GST-induced step up in 1Q2023 core had already been incorporated in the 200 bps upward re-centring on Oct 14, 2022,” he adds.

Other factors include the recent dip in the one-year and five-year inflation expectations in 4Q2022, the recent easing of the strength in the US dollar (USD), as well as the stepping down in the pace of tightening by the US Fed and other regional central banks.

The MAS may also wait to assess the lagged impact of earlier cumulative tightening moves amidst the expected growth slowdown, says Kit.

The analyst is expecting 2023’s core inflation to average at 4.1% and headline inflation to average at 5.6%.

“We see core rising to 5.5% in January, and peaking at 5.9% in February, before moderating to 5.3% in March and averaging 4.5% in 2Q2023 (1Q2023: 5.6%),” he says, adding that his forecasts for 1H2023 are “marginally higher”.

Further tightening can’t be ‘ruled out’

Finally, UOB’s senior economist Alvin Liew says further tightening in 2023 cannot be “ruled out”.

“While the continued easing of headline inflation is a welcomed development, the stickiness of core inflation reinforced the key point that the official outlook for prices remains unchanged and inflation risks also remain on the upside, and thus rendering no change to our monetary policy outlook,” he says.

“As we highlighted in earlier reports, Singapore’s monetary policy is further into a restrictive phase after five rounds of tightening since October 2021, although it may be still early to call a stop at this time,” he adds, noting that a major worry is the increasing of wages and the subsequent pass-through by businesses to domestic inflation.

“The MAS expects inflation to ease ‘more discernibly’ in the latter half of 2023, while continuing to emphasize the ‘upside risks to inflation’”, Liew points out.

In his report on Jan 25, Liew notes that the MAS is likely to continue with its data-driven policy stance. The central bank is also expected to continue along with the broad policy trends of major central banks, particularly the US Federal Reserve, which he expects the Fed funds rate to peak in 1Q2023.

“With the MAS pulling only one lever in its last decision in October 2022, we think there is still room for further tightening into 2023, especially if core inflation show signs of meaningful re-acceleration in the months ahead,” he says.

Liew’s forecasts for 2023 also remain unchanged, with headline inflation averaging at 5.0% and core inflation averaging at 4.0%.

“Excluding the 2023 GST impact, we expect headline inflation to average 4.0% and core inflation average 3.0% in 2023,” he says.

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