Singapore: Higher inflation opens the door to MAS tightening – UOB

Senior Economist at UOB Group Alvin Liew reviews the latest inflation figures in Singapore.

Key Takeaways

“Singapore’s headline CPI rose slightly faster than expected, at 1.0% m/m, 5.6% y/y in May (from 0.1% m/m, 5.4% y/y in Apr). Core inflation (which excludes accommodation and private road transport) also rose at a faster clip, up by 3.6% y/y in May (from 3.3% y/y in Apr).”

“The sources of price pressures for core inflation in May were broad-based, ranging from food, to services, to retail & other goods, including clothing & footwear, personal effects and personal care products, to electricity & gas. As for the headline CPI inflation, other than upside to the core CPI, both the accommodation costs and private transport costs were the key drivers of overall price increases.”

“External inflation pressures continue to be driven by the on-going Russia-Ukraine conflict which in turn, impacts commodity prices, especially energy and food. Supply-demand mismatches, as well as disruptions to global transportation and regional supply chains, add further upside to prices. Domestically, the tight labour market situation resulting in upside wage pressures also bears watching as it feeds into higher services cost.”

“We now expect headline inflation to average 5.0% (up from previous forecast of 4.5%) and core inflation at 4.0% (up from previous forecast of 3.5%) in 2022. This is in line with the official outlook for headline CPI (4.5 – 5.5%) but exceeds the official core inflation forecast range (2.5% - 3.5%), and the risks are tilted to the upside. Even as Singapore’s central bank, MAS, kept its core inflation forecast range unchanged, it highlighted in the report that improving demand and a greater passthrough of accumulating business costs to consumer prices will keep ‘core inflation significantly above its historical average through the year.’”

“We expect MAS to further steepen the S$NEER gradient at the Oct 2022 monetary policy meeting to 2% (from the currently estimated 1.5%), while leaving the width of the band and the level at which it is centred unchanged. But the risk of another double-tightening or a steeper slope or perhaps, most importantly, another off-cycle tightening (ahead of Oct) cannot be ruled out especially if core inflation accelerates well above 4% in the next few months.”