SINGAPORE (June 23): Singapore’s core consumer price index (CPI) or inflation remained in negative territory in May.

Core inflation, which registers inflation levels excluding accommodation and private transport costs, fell 0.2% y-o-y in May, compared to the 0.3% contraction in April, according to the Monetary Authority of Singapore (MAS), and the Ministry of Trade and Industry (MTI). This is the fourth consecutive month that core inflation has contracted.

The slight improvement was attributable to smaller declines in the costs of services and electricity, as well as higher food inflation, they said in a joint statement on Thursday.

Meanwhile, CPI-all items inflation fell for the second month in a row, to 0.8% y-o-y in May, from the -0.7% in the previous month. This was mainly due to a larger decline in private transport costs (which includes both car and petrol prices), as well as the continued suspension of Electronic Road Pricing (ERP) charges, which also lowered costs for private transport.

Prices in transport fell 4.8% y-o-y overall; private transport fell 6.8% y-o-y in May, mitigated by an increase by 2.3% y-o-y in public transport. Other transport services also saw a 0.3% dip y-o-y in the same month.

Prices in clothing and footwear declined 4.4% y-o-y; clothing prices fell the most at -5.3% y-o-y.

Inflation in healthcare dipped 1.9% y-o-y.

Inflation in accommodation remained flat as housing rents rose at a steady pace.

The pace in decline in the cost of electricity and gas eased as new subscriptions under the Open Electricity Market (OEM) slowed.

The decline in the cost of services narrowed to 0.8% y-o-y from April’s 1.1% y-o-y decline, due to lower prices in holiday expenses and air fares. The change in prices for these components were calculated using the overall change in the CPI-All Items, in line with international guidelines, as prices were not available in May owing to the nationwide lockdowns across the globe.

Food prices rose 2.2% y-o-y – the only sector to see an increase – on the back of a larger increase in the prices of non-cooked food items. Of these, meat, as well as sugar, preserves, and confectionery saw the sharpest increase of 9.1% y-o-y, and 7.7% y-o-y respectively.

Looking ahead, MAS and MTI say that inflation is expected to remain “subdued”, with both the core inflation and CPI-All Items inflation forecasted to average between -1% and 0% in 2020.

“External sources of inflation are likely to remain benign amid weak global demand conditions. Oil prices should stay low for an extended period and will weigh on the prices of energy‐related components in the CPI basket”, they say.

Supply chain disruptions owing to the global lockdown measures may cause increased prices on imported food.

“Locally, subdued economic sentiment and weak labour market conditions 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,” they add.

OCBC’s head of treasury research and strategy, Selena Ling, says she expects disinflation to continue into June, potentially extending till the end of 2020.

“Given that domestic demand may only gradually recover with the transition to Phase 2 on 19 June amid a softening labour market, we may not see a quick bounce back into positive territory anytime soon,” she says.

The emergence of a second wave of Covid-19 infections in Beijing, China; South Korea; and the Sun Belt in the US may prevent local consumers from going all out even with the recent re-opening of retail shops and restaurant dine-ins on June 19.

“While there may be some pent-up demand translating into an initial rush of enthusiasm for retail purchases and eating out in the very near-term, the key is if the momentum would sustain in to 2H20, especially since the medium-term picture remains one of subdued labour market conditions and general market caution over second infection waves which may cap domestic demand, especially for discretionary items,” says Ling.

“For example, the recent re-opening of car showrooms and the resumption of COE bidding exercises on 6 July will be interesting to watch to see if weak consumer sentiments will prevail. Both MTI and MAS reiterated their 2020 headline and core CPI forecasts of 0% to -1%, citing that cost pressures are likely to remain low as some degree of spare capacity in the economy emerges. Our headline and core inflation forecasts are both -0.4% yoy for 2020,” she adds.

Maybank Kim Eng analysts Chua Hak Bin and Lee Ju Ye say their forecasts remain unchanged for headline CPI at -0.5%, and core CPI at -0.4% in 2020 as the economy sinks into a deep recession.

“Higher footfall traffic and pent up demand will ease the decline in retail prices. Consumer spending will however not return fully to pre-Covid levels in Phase 2, given a weaker labour market and falling wages,” they say.

“This will cap price increases for discretionary goods and services. Services inflation will likely remain negative in 3Q, given wage cuts and job losses,” Chua and Lee add.

With that, the analysts expect employment to contract to 150,000 from 100,000 this year, with more than two-thirds of job losses borne by foreigners.

Border restrictions also remain tight, which will weigh on holiday expenses and airfares.

“We expect the MAS to maintain its policy of a neutral bias (zero appreciation of the SG$NEER) at the October meeting. The SG$NEER is currently trading at around +0.4% above the estimated mid-point,” they say.

RHB's Singapore research team has maintained its headline forecast at -0.3% for 2020.

"Nevertheless, we remain cautious in our inflation outlook as we follow the impact of COVID-19 domestically and globally," it says.