Singapore’s core and headline inflation figures have surpassed analysts’ expectations in March 2022.

During the month, the Monetary Authority of Singapore (MAS) core inflation rose to 2.9% on a y-o-y basis, which is the highest since March 2012.

The figure, which matches the print in February 2012, was driven by higher inflation for food and services.

Food inflation rose as the price of non-cooked food and food services increased at a faster pace. The inflation in the services sector saw an increase mainly thanks to a larger increase in the cost of other transport services and holiday expenses. The costs of recreational and cultural services, as well as point-to-point transport services also saw a higher increase.

Meanwhile, inflation for retail and other goods edged up as the costs of telecommunication equipment and personal care products rose. The prices of recreational and cultural goods as well as alcoholic drinks and tobacco saw steeper increases during the month. Electricity and gas prices also increased at a faster pace. The average electricity prices paid by households under the open electricity market (OEM) saw a larger increase on the back of a global increase in oil prices.

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Headline inflation, or CPI-All Items inflation, surged to 5.4% y-o-y in March, which is the highest since April 2012, due to the inflation in private transport and accommodation, in addition to the pickup in core inflation.

Inflation for private transport, which was the key driver of headline inflation, grew on the back of all-time highs in prices for cars as well as petrol. At the same time, inflation for accommodation grew along a larger increase in housing rents.

On a month-on-month (m-o-m) basis, core CPI and CPI-All items increased by 0.7% and 1.2% respectively.

Despite the 10-year high, inflation has yet to peak, warns Selena Ling, chief economist and head of treasury research and strategy at OCBC bank.

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“MAS and [the] Ministry of Trade and Industry (MTI) flagged that external inflationary pressures have intensified amid the global commodity price surge and renewed supply chain problems due to the Ukraine war and the regional Covid situation, although China was not specifically mentioned,” Ling writes.

In addition, the cost pressures in the domestic labour market are likely to support a firm pace of wage increases over in the rest of 2022. Businesses may also pass on more of the elevated and cumulative business cost increases to consumer prices, which will keep core inflation “significantly above” its historical average,” Ling adds.

As such, the analyst expects core CPI to accelerate further in the coming months but it sees a moderation towards the end of the year. Headline inflation, on the other hand, is expected to increase “by a bigger magnitude” due to higher private transport and accommodation prices on the back of still-healthy domestic demand.

On this, Ling has upgraded her headline CPI forecast to 5.0% from 4.2% previously. She has kept her core CPI estimates unchanged at 3.5% y-o-y.

“The official headline and core CPI forecasts were lifted at the recent MAS MPS decision to 4.5-5.5% and 2.5-3.5% respectively in mid-April. Given the global tide of hawkish central banks spanning the Federal Open Market Committee (FOMC) to the European Central Bank (ECB) etc, it remains to be seen if frontloading of monetary policy tightening will suffice to combat imported inflation, or potentially risk stagflation as runaway prices impact business and consumer confidence and contribute to the risk of policy mistakes precipitating a more significant demand and growth moderation,” she says.

“For Singapore, domestic growth prospects have actually been improving with the relaxation of Covid-measures being lifted earlier than expected, so the 3-5% 2022 growth forecasts remains realistic,” she adds.

UOB economist Barnabas Gan has kept his headline inflation estimate unchanged at an average of 4.5% y-o-y by the end of 2022

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Like Ling, however, Gan also sees Singapore’s inflation figures inching up further in the next few months ahead.

“Given the supply chain disruption and higher oil prices, we expect food inflation to trend higher into the year to as high as 3.9% y-o-y at end 2022, while transport costs will likely grow at double-digit rate for the most part of this year,” he writes. Higher import prices and domestic wage growth are also expected to contribute to the higher inflation figures, he adds.

“Overall, core inflation, a measure that “MAS monitors most closely, among the range of indicators”, is expected to trend higher above its 3.0% handle for the rest of this year, and average 3.5% in 2022,” Gan continues.

On the back of persisting inflation pressures, Gan also expects MAS to further steepen the S$NEER gradient slightly in its upcoming policy statement in October. The central bank is expected to leave the width of the band and the level at which it is centred, unchanged.

To Gan, Singapore’s core inflation is expected to accelerate to above 3.0% for the rest of 2022.

Maybank Securities economists Chua Hak Bin and Lee Ju Ye say they expect core inflation to breach 3.0% y-o-y in the 2Q2022 on the back of rising commodity prices, supply disruptions and labour shortages.

“The MAS expects the labour market to remain tight and support a firm pace of wage growth, which will filter through to higher services costs. Headline CPI will likely remain above +5% in 2Q as private transport and accommodation costs remain firm,” the analysts write.

“Following the ‘double’ tightening move in April, we are expecting the MAS to maintain the current tighter stance and steeper slope at the October meeting, unless inflation surprises on the upside to such an extent, warranting yet another material change to the MAS’ inflation forecast,” they add. “MAS had already raised its 2022 inflation forecasts significantly in the April meeting, projecting headline inflation at 4.5%- 5.5% and core inflation at 2.5%-3.5%.”

The way Chua and Lee see it, an appreciation in the Singapore dollar may not be enough to contain the intensifying inflation pressures or ease the tightness in the labour market.

“The government may have to review its stricter foreign labour policies and plans to introduce the local qualifying salary (minimum wage) and expand the Progressive Wage Model in September this year,” they write.

“A wage-price spiral is threatening to hit both businesses and consumer wallets. Foreign worker levies may have to be lowered and the dependency ratio ceilings temporarily relaxed. A supplementary budget may be necessary to ease the burden from the rising costs of living for lower income households,” they add.

CGS-CIMB Research economists Terence Lee and Nazmi Idrus have raised their headline inflation forecast to 5.1% y-o-y on the back of the higher-than-expected forecast in March.

The revised forecast is due to a change in the global inflationary outlook over the past two months, the analysts write.

While the rise in core inflation is also gaining momentum, Lee and Idrus are expecting its FY2022 increase to be within MAS's forecast range of 2.5%-3.5%.

"MAS already announced a tightening of the monetary policy through a re-centre and increase the rate of appreciation of the S$NEER policy band. While we expect this to dampen some of the imported inflation, the robust domestic recovery and border reopening will likely project a continued demand-pull pressure," they say.

Peak in inflation yet to come as Singapore’s core and headline inflation jumps to 10-year high

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