Singapore’s core inflation monitored by the Monetary Authority of Singapore (MAS) has eased to 2.2% in the month of February from the 2.4% recorded in January. The figure stands below the estimated 2.6%, according to market watchers.

The lower core inflation was attributed to lower inflation for services, food, as well as electricity & gas, according to data released by MAS and the Ministry of Trade and Industry (MTI) on March 23.

However, MAS and MTI have warned MAS core inflation is likely to increase in the near term, and could reach 3% in the middle of 2022 before easing in the second half of the year as external inflation recedes.

That said, the central bank, as well as the MTI, are expecting global inflation remain high “for some time” before easing in the latter half of 2022.

“In the near term, heightened geopolitical risks and tight supply conditions will keep crude oil prices elevated. Supply-demand mismatches in commodity markets due in part to geopolitical factors, bottlenecks in global transportation, as well as labour shortages in a number of Singapore’s major trading partners are also likely to persist,” reads the statement released by the central bank and the ministry.

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“While ongoing external supply constraints should ease in the second half of 2022, leading to some moderation in imported inflation, there remain upside risks to inflation from geopolitical and pandemic-related shocks,” continues the statement.

For 2022, MAS and MTI have projected MAS core inflation to between 2% to 3% while CPI-All Items inflation is forecast to come in within 2.5% to 3.5%.

CPI-All Items inflation up to 4.3% in February

Meanwhile, CPI-All Items inflation rose to 4.3% in February, higher than market expectations of a 4.2% y-o-y increase, and up from January’s 4.0%.

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This was mainly attributable to higher private transport inflation which more than offset the decline in core inflation. During the month, costs of private transport increased as certificate of entitlement (COE) prices picked up at a stronger pace due to the lower quota allocated for February to April.

"Headline inflation has accelerated for six straight months, from 2.4% y-o-y in August 2021, underlining that inflation risks remain tangible at this juncture," says UOB economist Barnabas Gan.

Similarly, accommodation inflation rose due to a larger increase in housing rents.

According to Maybank Securities analysts Chua Hak Bin and Lee Ju Ye, accommodation costs, which rose 3.3% in February, have increased at the fastest pace since November 2013 on the back of increasing housing rents.

“Rentals will likely continue rising with the recovery in non-resident employment as border controls are relaxed. Non-resident employment expanded for the first time in two years in the fourth quarter of 2021 (+24,200), a turnaround which will likely continue in the first quarter of 2022,” write the analysts.

The cost of retail and other goods also inched up slightly due to a larger price increase for personal effects, which more than offset the pace of decline in clothing and footwear prices.

The growth rate for electricity and gas prices eased as the average electricity prices paid by households under the open electricity market (OEM) saw a smaller increase.

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Inflation for food prices also eased as lower inflation for non-cooked food such as fish and seafood, fruits and vegetables more than offset the higher inflation for cooked meals.

Inflation for services fell as the cost of telecommunication fees fell sharply. Inflation for holiday expenses also eased as inflation for airfares saw moderation during the month. The lower growth in the inflation for airfares eased due to the relaxation of the mandatory testing measures, which led to lower costs for Covid-19 tests under the vaccinated travel lanes (VTLs).

On a month-on-month (m-o-m) basis, CPI-All Items increased by 0.9% while core CPI was unchanged in February.

Looking ahead, MAS and MTI predict that the labour market in Singapore should continue to tighten and lead to strengthened wage pressures over the year.

“Cost increases are likely to filter through to higher services prices as private consumption picks up. For the non-core CPI components, car and accommodation cost increases are likely to remain strong in the near term, keeping headline inflation elevated.”

Maybank’s Chua and Lee have kept their 2022 forecasts for headline and core inflation at 3.6% and 2.7% respectively. The analysts’ expectations for core inflation are within MAS and MTI’s estimated range, while their headline inflation estimate comes in slightly above the range predicted by the government bodies.

“The Ukraine-Russia conflict intensified in March, driving both food and energy prices higher and disrupting commodity supplies. Core inflation will likely jump in March. Domestically, rising wage costs in a tighter labour market and stricter foreign worker measures will filter through to higher services prices,” write the analysts.

“We expect the MAS to tighten again by re-centreing the band in April, which will provide more room near term for the S$NEER to appreciate and contain imported inflation. MAS will likely maintain the current slightly steeper slope, given the worsening growth outlook in the medium term,” they add.

UOB's Gan says he expects domestic headline inflation to slow towards the 3.0% handle for the remaining parts of the year, on the back of higher base effects between 2Q2021 – 4Q2021.

"However, core inflation could remain at 2.0% or higher for the remaining part of the year. Supply chain frictions are likely to stay elevated especially for food and raw materials, while higher global commodity prices may inject higher pass-through effects to both consumer and business prices. Moreover, geopolitical tensions, should it exacerbate, may inject further uplift to oil prices," he writes. "We have previously upgraded our inflation outlook to average 3.5% in 2022 in our UOB 2Q2022 quarterly report."

Like the Maybank analysts, Gan notes that the acceleration in headline inflation, as well as core inflation crossing the 2.0% handle for the third month, has reinforced his call for MAS to further tighten monetary policy in April.

"Note that MAS had previously slightly raised the slope of the S$NEER policy band in an off-cycle meeting in January. We currently perceive the S$NEER policy slope to be at an annual 1.0% appreciation gradient, even as policymakers kept the width of the policy band and the level at which it is centred unchanged," he says.

"As such, we continue to look for the MAS to raise the policy slope to a 1.5% gradient (from the current estimated slope at 1.0%), while keeping the width and centre unchanged in the upcoming April meeting. Meanwhile, there is also a material risk for the MAS to recentre its policy band higher, given the relative strength in the SGD NEER (1.91% above the mid-point at the time of writing)."

Singapore's core inflation eases to 2.2%; global inflation expected to stay high: MAS and MTI

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