Some analysts upgrade inflation forecasts; say more relief measures might be needed if prices keep rising

SINGAPORE: Inflationary pressures are set to persist in Singapore, with latest official data prompting economists from at least two financial houses to upgrade their inflation forecasts.

And if the flare-up in inflation continues into later in the year, more support measures beyond the latest S$1.5 billion relief package might be needed, economists told CNA.

Latest data released on Thursday (Jun 23) showed consumer prices hitting fresh multi-year highs in the month of May, led by higher costs of food and utilities.

Headline or overall inflation rose to 5.6 per cent from 5.4 per cent in April, hitting its highest reading since November 2011 when headline inflation reached 5.7 per cent.

Core inflation, which excludes private transport and accommodation costs, went up from 3.3 per cent to 3.6 per cent – the index’s peak since December 2008 when core inflation came in at 4.2 per cent.

Both consumer price indices have now breached the upper end of the central bank’s full-year forecasts, which were revised most recently in April.

The Monetary Authority of Singapore (MAS) reiterated its estimate on Thursday, which is for 2022’s headline inflation to average at 4.5 to 5.5 per cent and core inflation to be between 2.5 and 3.5 per cent.

Asked for their outlook, economists noted that the factors that have heated up inflation in recent months are unlikely to go away soon. These include surging global energy and food prices, as well as a tight labour market and improving domestic demand.

In fact, inflation data in June will have to contend with an additional factor – Malaysia’s chicken export ban which kicked in at the start of the month and resulted in some businesses in Singapore raising prices, said CIMB Private Bank economist Song Seng Wun.

That said, favourable base effects in the second half of the year could mean that year-on-year inflation numbers may start to come off their highs, albeit “not too much” as the confluence of inflationary pressures remain, he added.

Barclays regional economist Brian Tan also expects Singapore’s consumer price indices to pick up further before “stabilising” in the months of July and August, largely due to base effects from a year ago.

“Inflation was still quite tame in the first half of 2021 so as inflationary pressures built up at the start of the year, we’ve seen the numbers climb up so quickly,” he told CNA in a phone interview.

“But in the second half of last year when measures were eased to reopen the economy, inflation picked up so that will create a little bit of a balancing effect against the high inflation we are getting now.”

Maybank economists Chua Hak Bin and Lee Ju Ye reckon that core inflation will likely peak in the third quarter, as commodity prices have been dropping from their recent peaks.

Recent moves by some countries to relax their export bans on items such as palm oil and fertilisers will help ease food price pressures. The slowdown in global growth and monetary tightening also combine to slow demand and cool commodity prices, they wrote in a note.

Still, the economists have raised their full-year inflation forecasts to account for stronger-than-expected price pressures, especially from energy and food, as well as elevated Certificate of Entitlement (COE) premiums and rental costs.

The tight labour market in Singapore also risks fanning a “wage-price spiral”, which happens when workers demand higher pay to keep up with inflation thereby prompting companies to raise prices to cover their costs.

Maybank now expects core inflation to come in at 3.2 per cent for 2022, up from an earlier 3 per cent estimate, and headline inflation to be at 5.1 per cent, versus 4.8 per cent previously.

Also raising his projections by 0.5 percentage points each, UOB’s senior economist Alvin Liew is pencilling in full-year headline inflation at 5 per cent and core inflation at 4 per cent.

“This is in line with the official outlook for headline CPI but exceeds the official core inflation forecast range, and the risks are tilted to the upside,” he wrote.

MORE MAS TIGHTENING OR SUPPORT MEASURES?

Rising inflation data, in particular core inflation which is the key gauge for the MAS, will likely bolster the case for further monetary policy tightening, economists said.

The central bank has tightened monetary policy three times since last October, including an unexpected inter-meeting move, to allow for a stronger Singapore dollar.

Mr Liew said he expects the central bank to go for another steepening in the slope of the policy band when it holds its next policy meeting in October.

“But the risk of another double-tightening or a steeper slope or perhaps … another off-cycle tightening (ahead of October) cannot be ruled out especially if core inflation accelerates well above 4 per cent in the next few months,” he added.

Beyond that, stronger action to buffer consumers from the drag of rising prices may also be needed.

This week, the Government rolled out a S$1.5 billion support package targeted at providing immediate relief for lower-income and more vulnerable groups.
 
The move “highlights the likely impact current inflation dynamics will have on (economic) growth”, said ING’s senior economist Nicholas Mapa.

Mr Tan noted that it was “always going to be fairly challenging” for monetary policy alone to quell inflation quickly, especially for Singapore which uses the exchange rate, instead of interest rate, as its main policy tool.

“You’re going to need a very strong Sing dollar policy to fully offset that inflation pressure and if you have to tighten policy by that much, it could have a lot of unintended and damaging consequences,” he added, pointing to growing concerns over a recession in the United States following aggressive interest rate hikes by the Federal Reserve.

“There’s cause for caution in terms of how aggressive you tighten monetary policy so from that perspective, it’s always going to be difficult to fully offset inflation pressures by using monetary policy.”

He added that the Government is aware of the “strong distributional” effects of inflation, especially on the lower-income and vulnerable groups which is why it has rolled out the latest support package.

“Is that enough? That’s a question mark and I would not be surprised if they decide to do another round of this,” said Mr Tan.

Mr Song noted that the necessity of another support package will depend on whether inflation continues to surprise on the upside even with the higher base effects later in the year, as well as its trickle-down impact on overall economic growth.