Singapore’s core and headline inflation remained in the red in July 2020, despite the Phase Two measures which allowed most businesses to resume activities from June 19.

Core inflation – a key metric used by the central bank to develop Singapore’s monetary policy based on price increments to sectors other than accommodation and private transport – touched its lowest point in more than a decade with a 0.4% contraction.  

Prior to this, the lowest point for the metric was -0.5% in January 2010.  

July’s showing is in line with expectations of private-sector economists, and is a deeper contraction from the -0.2% registered in June 2020, according to the Consumer Price Index (CPI) released by the Department of Statistics (Singstat) on August 24.

“This was mainly driven by a steeper decline in the cost of electricity & gas, as well as lower food inflation,” the Ministry of Trade and Industry (MTI) and the Monetary Authority of Singapore (MAS) elaborate in a joint statement.

Electricity and gas costs plunged to -15.2% in July, from -3.9% in June following a downward revision of the electricity tariff.

Food prices, on the contrary, edged down to a 2.2% growth, from 2.3% as inflation levels for cooked fell. 

Meanwhile, headline measure – the measure of the total inflation in the economy – came in at -0.4%, improving marginally from the -0.5% posted in the previous month. This surpasses the 0.6% drop forecast by analysts.

This follows a smaller decline in the cost of private transport – from -4.4% in June to -2.1% in July. The authorities attribute this to an increase in car prices – presumably from the resumption of the Certificate of Entitlement (COE) bidding exercise, which was stalled during the circuit breaker.

Retail and other goods was another sector to register a smaller decline of -1.6% in July, from -1.8% the month before thanks to an increase in the prices of telecommunication equipment. The sector also had a lift from a moderation in the prices of household durables and personal care items.

Similarly, services costs also eased slightly to -0.8% from June’s -1.0%. This arises from the combination of a slower pace of decline for holiday expenses and airfares and a more rapid increase in the cost of telecommunication services.

Logging a growth of 0.4%, accommodation prices bucked the decline trend – but also inched down from June’s 0.5% due to a slower pace of increase in housing rents.

Looking ahead, the MAS and MTI expect inflation to remain subdued at their previous forecast range of -1% and 0% in 2020.

This is due to the lower oil prices that are expected to weigh on the prices of the energy-related components in the metric and a decline in international food commodity prices, the authorities note.

However, international measures to contain the Covid-19 outbreak have led to supply chain disruptions, which could exert an upward pressure on imported food prices, they add.

On a domestic front, they expect cost pressures to remain low, given the “subdued economic sentiment and weak labour market conditions”. This, they note, “will dampen consumer demand, thereby capping price increases for discretionary goods and services”.

“Cost pressures are likely to remain low as some degree of spare capacity in the economy emerges.”

The latest showing indicates that “inflation is probably close to botting out as the economy emerges from the lockdown and most businesses re-open,” observe Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye.

“A weak labour market and falling wages will likely cap domestic price pressures. Services costs will stay in deflation in 3Q. Inflation may turn a small positive only in late 4Q, when a larger proportion of the economy normalises".

Chua and Lee are maintaining their forecasts of -0.5% for headline and -0.4% for core inflation. 

Offering a different perspective, UOB economist Barnabas Gan expects the rate of deflation to taper as Singapore’s tourism sector gets a shot in the arm from the easing of inbound travel.

Come September 8, Singapore will allow general travel from Brunei Darussalam and New Zealand via an Air Travel Pass.

This is on top of past policies which established Reciprocal Green Lanes and Periodic Commuting Arrangement between Singapore and Malaysia, as well as with China via the “fast-lane” arrangement, where cross-border travel for essential business and official purposes will be allowed.

“Notwithstanding the potential uptick in inbound travel, we continue to expect deflation pressures to persist for the rest of this year,” says Gan who is keeping his full-year headline and core inflation forecasts at -0.3% in 2020.