Analysts are keeping their inflation estimates for the FY2022 even as July’s headline inflation was a sharp pick up from June’s figures and was the highest since June 2008.
In July, MAS core inflation, which rose to a fresh 13-year high, also stood higher than forecasts estimated by the consensus.
Inflation may peak closer to October: OCBC
Selena Ling, OCBC Bank’s chief economist and head of treasury research & strategy, is keeping her current headline and core CPI forecasts unchanged at 5.5% and 4.0% respectively. Ling’s estimates are assuming that inflation may only peak closer to October in 2022, she says.
She adds that the headline inflation growth may be worrying to the man on the street, but the resident wage growth in the 1Q2022 was 7.8% higher y-o-y. “[This suggests] that wages are adjusting to the higher inflationary environment, albeit it may be uneven across different industries and/or jobs,” she points out.
On the higher-than-expected MAS core inflation, Ling says the more buoyant core CPI print may not “imply another off-cycle monetary policy tightening… since the S$NEER is fairly well behaved and contained around +1% region above its parity”.
See also: Singapore all-items CPI up 7.0% in July; MAS Core Inflation up by 4.8% y-o-y
“My baseline case is still for another tightening at the scheduled October monetary policy statement (MPS) as inflation has not yet peaked and shown signs of stabilisation,” she adds.
Core inflation may stay elevated for longer: UOB
To UOB’s senior economist Alvin Liew, the core inflation surge may have come as a surprise, its sources for price pressures in July were not expected.
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In July, inflationary pressures were across the board with food being one of the main drivers as poultry and fish prices surged during the month. Services saw price increases due to higher outpatient costs, airfares and recreational & cultural services. Electricity & gas also registered price inflations due to the larger increase in electricity and gas tariffs that took place in 3Q2022, Liew notes.
Referring to the Monetary Authority of Singapore’s (MAS) and the Ministry of Trade and Industry’s (MTI) inflation outlook in July, Liew adds that the previous expectation for core inflation to peak in 3Q2022 has been removed. However, within the same statement, MAS and MTI have both maintained that core inflation is likely to ease towards the end of 2022.
“This likely means that core inflation may stay elevated for longer,” says Liew.
On this, Liew has kept his forecasts for headline and core inflation unchanged at an average of 6.0% and 4.2% respectively. Liew’s headline estimate is at the top end of the official range, while his core inflation estimate remains above the official estimate.
While the latest inflation print does not change his view on the MAS policy with the October MPS to be released as scheduled, Liew is anticipating the MAS to tighten its policy further via the steepening of the S$NEER gradient in the October announcement. He adds that MAS is likely to leave the width of the band and the level at which it is centred unchanged.
“We estimate the current slope of the S$NEER to be 1.5% appreciation per annum and has room to go higher when we look at historical episodes of MAS policy decisions. Our expectation is for the slope to be raised to 2% in October,” he writes.
“The risk of another double-tightening or an even steeper slope (say, 2.5%) cannot be ruled out especially if core inflation accelerates well above 4% in August,” he adds.
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To this end, Liew does not expect to see another off-cycle announcement in the period leading up to the October MPS due to MAS’s policy being “already in [a] restrictive setting”. The only exception would be when Singapore gets an “extreme acceleration” in its core CPI inflation for August, which will be released on Sept 23.
Inflation pace to remain around the 7.0% handle before falling to the 5.0% level in 4Q2022: RHB
RHB Group Research’s senior economist Barnabas Gan is expecting Singapore’s inflation momentum to remain elevated before easing towards 4Q2022.
“In a nutshell, we forecast that the inflation pace will stay at around the 7.0% handle in the coming months before dissipating towards the 5.0% level in 4Q2022,” he writes.
In his report, Gan is expecting to see the MAS further tightening their policy at the upcoming October MPS via a “slight” increase of 0.5% in the slope gradient. Like UOB’s Liew, Gan does not see the width and level at which it is centred to be changed.
While inflation is expected to ease in the coming months, Gan acknowledges that there are still “significant upsides” to his outlook.
“The risks are centred around both cost-push and demand-pull drivers: Cost-push drivers include potentially higher prices for heavyweight components such as food and energy should there be an unexpected exacerbation of supply constraint challenges,” he says.
“On this, we note that there remains no clear resolution to the Russia-Ukraine tensions. At the same time, energy prices may stay elevated towards end-year, given the European Union’s decision to ban seaborne imports of Russian crude oil effective December 2022. Domestically, demand-pull drivers will likely be shouldered by a tighter labour market which would keep wage growth and consumer demand strong,” he adds.
Gan has retained his headline and core inflation estimates at 5.8% and 3.8% respectively for the full year in 2022.
Citi sees a 40% chance of an upward re-centring in October
The jump in July’s core CPI, while above consensus forecasts, met Citi Research’s Kit Wei Zheng estimates.
“With MAS possibly now expecting core to peak at a later and higher level than in July, the neutral S$NEER path could now touch the band ceiling in 1Q2023, and we see a 40% chance of an upward re-centring in October,” he writes.
The analyst is expecting core inflation to rise further to 4.9% in August and September and peaking at 5.2% in October before moderating to 4.9% in December.
He also sees headline inflation peaking at 7.2% in August before moderating to 6.1% in December.
In his report, Kit sees a number of plausible factors behind the delayed and higher peak in Singapore’s core inflation. The recent sharp spike in natural gas prices, which could raise electricity tariffs further in October, as well as the 8.4%-8.5% hike in minimum salaries for 19,000 retail workers from Sept 1, are some of them.
Other factors include the Formula One event from Sept 30 to Oct 2 that could have a “short-lived impact” on accommodation, food services, airfares and recreation costs in October.
“Into 2023, continued wage hikes under the progressive wage model (PWM), along with the GST hike will likely keep core averaging around 3.2%, well above the historical averages of 1.5%-2%,” says Kit.
On the possibility of an upward re-centring in October, Kit says, “With core likely averaging 2%-2.5% in 2023 even after excluding the one-off impact of GST, our base case of a 50 basis point (bps) slope steepening to 2% could more strongly ensure that the slope of the band (and not just the level of the NEER) is closer to neutral in real terms”.
“We estimate that the neutral NEER path based on MAS’s mid-Jul inflation forecast would have averaged about 20bps above the mid-point in 2H2022 and an estimated 70bps in 2023. But our updated forecast profile has likely raised the neutral NEER path by around 100 bps in 2H2022, and 80 bps-90 bps in 2023, intermittently touching the band ceiling (including in 1Q2023),” he adds.
He continues: “Prior to the last two re-centring episodes, the neutral NEER path had also been hugging the band ceiling, with the subsequent re-centring bringing the forecasted neutral path closer towards the mid-point. Urgency of dampening still elevated inflation momentum sufficiently before the GST hike in Jan 2023 (to avoid unanchoring inflation expectations) may also argue for upward re-centring to front load policy tightening.
“Still if the positive output gap is seen narrowing or closing in 2023, any Oct upward re-centring might also be less aggressive than in the last two episodes, broadly consistent with PM Lee’s recent comments that the policy of strengthening the SGD cannot be overdone.”
