Singapore’s headline consumer price index (CPI) moderated further to 4.0% in August on a y-o-y basis, down from June’s 4.5% reading and down from 4.1% in July.
The Monetary Authority of Singapore’s (MAS) core inflation, which excludes private transport and accommodation, also eased to 3.4% on a y-o-y basis.
The lower headline inflation was due to the lower core and accommodation inflation and offset by higher inflation for private transport due to a steeper increase in car prices.
Core inflation fell due to lower inflation for services, food and retail & other goods.
On a m-o-m basis, headline CPI – or CPI-All Items rose by 0.9% as accommodation and private transport costs increased while core CPI rose by 0.1% due to higher food and services prices.
Looking ahead, core inflation is expected to moderate further over the next few months as imported costs remain low on a y-o-y basis and as the current tightness in the domestic labour market eases.
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However, private transport inflation is expected to pick up in the near term due to the ongoing strong demand for cars. Meanwhile, accommodation inflation should continue to moderate over the course of the year due to the higher number of housing units available for rent.
For 2023, the government has kept its estimates unchanged, with headline inflation projected to come within 4.5% to 5.5%. Core inflation is expected to come within 3.5% to 4.5%.
Excluding the transitory effects of the 1%-point increase in the GST to 8%, headline and core inflation are expected to come in at 3.5% – 4.5% and 2.5% – 3.5% respectively.
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“Upside risks remain, including fresh shocks to global energy and food commodity prices and more persistent-than-expected tightness in the domestic labour market. At the same time, there are also downside risks such as a sharper-than-projected slowdown in the global economy which could induce a greater easing of inflationary pressures,” says the MAS and the Ministry of Trade and Industry.
What the analysts say...
UOB analysts Alvin Liew and Jester Koh are keeping their 2023 inflation headline forecast and core inflation forecast at 4.7% and 4.0% respectively although they see that risks to inflation remain on the upside.
"[This is] given the recent food supply shocks on climate-related events and export restrictions and levies imposed by India as well as the recent surge in global oil prices," they write.
Ahead of the MAS's monetary policy statement (MPS) that's coming in October, the analysts' base case, with a probability of 40%, is for MAS to maintain the status quo and retain the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at 1.5%.
"With our 2023 core CPI forecast of 4.0% falling well within MAS’s 2023 core CPI forecast of 3.5% - 4.5%, the existing (estimated) slope of 1.5% per annum (p.a.) continues to allow for a gradual and measured nominal appreciation of SGD against its trade-weighted basket of currencies which should continue to curb imported inflation, in particular, imported food & energy prices," they write.
"Furthermore, the level of core inflation at 3.4% as of August 2023 may be too high relative to the long-term average (January 2003 to August 2023) of 1.8% for MAS to be convinced to reverse some of the monetary policy tightening, in our view," they add.
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However, the analysts are also seeing the possibility of MAS reducing the slope of the S$NEER band slightly, with a probability percentage of 40%. The band may be reduced by 50 basis points (bps) to an estimated 1% "should MAS place more weight on the weakening external outlook (implying a more negative than expected domestic output gap) and/or completely exclude the effects of GST in assessing the inflation trajectory, implying that the y/y core inflation level is effectively closer to the 2% handle".
"Given MTI’s narrowing of the official 2023 GDP growth forecast to 0.5% to 1.5% from its original projection of 0.5% to 2.5% and a more pessimistic external outlook narrative during the second quarter final GDP release, confidence in the domestic growth outlook has weakened which is likely accompanied by a concurrent worsening in the assessment of the 2023 output gap of -0.4%, revealed in the April 2023 Macroeconomic Review. Thus, a less restrictive monetary policy via a slight 50 bps reduction in the slope of the S$NEER policy band may provide some countercyclical effects to support the recovery of growth back to potential," say the analysts.
OCBC's chief economist and head of global markets research and strategy Selena Ling notes that the moderation reflects a disinflation being "on track" for the Singapore economy.
August's figures stood "largely in line" with Bloomberg consensus forecast of 4.0% (headline) and 3.5% (core) y-o-y and Ling's forecast of 4.1% and 3.3% y-o-y respectively.
"Year-to-date, headline and core CPI have risen 5.2% and 4.6% y-o-y, but is expected to decelerate further to average 4.4% and 4.0% respectively for the whole year 2023. This is lower than the 6.1% and 4.1% registered in 2022 and reinforces the story that the cumulative effects of five consecutive monetary policy tightening moves by the MAS in the run-up to April 2023 continue to exert downward pressure on price trends, especially for imported goods," she writes.
However, Ling adds that there seem to be some domestic cost pressures lingering despite the decline in the prices of imported goods on a y-o-y basis.
"Services inflation is subsiding and rose only 3.1% y-o-y in August, versus 3.6% in July, amid smaller hikes in holiday expenses (especially in airfares), telecom services and recreational & cultural services costs. Food inflation is also abating at 4.8% y-o-y in August, versus 5.3% in July, as prepared meals and non-cooked food prices saw more moderate increases," she writes.
"However, the story may evolve towards the year-end as demand for overseas travel picks up again for the festive season and if elevated oil prices [are sustained] given that Russia and Saudi Arabia have extended their production cuts till year-end. Meanwhile, rice prices have also been rising due to weather patterns (e.g. El Nino) and India’s export ban on the widely consumed non-basmati white rice on July 20 to control rising domestic prices which followed the ban on broken rice exports last year," she adds.
Given that this is the last inflation reading before the upcoming MPS review in early October, Ling is expecting the central bank to "stay on hold" for now.
"Any expectations for MAS to ease monetary policy or to adopt an even more dovish stance may still be premature for now," she says.
For the time being, Ling has kept her headline and core inflation forecasts for 2023 unchanged at 4.3% and 4.0% y-o-y respectively, assuming that both figures will moderate to a sub-3% y-o-y handle by 4Q2023 due to the high base effects.
"This would likely pave the way for a more dovish tilt and potential monetary policy easing in 2024 if needed," she writes.
"We believe inflation trumps growth concerns for now, thus warranting the MAS to keep all of its monetary settings unchanged in the October meeting," says Yun Liu, economist at HSBC Global Research.
"Leading up to the October MAS meeting, core inflation continues to deliver good news, decelerating to 3.4% y-o-y in August from its peak of 5.5%," she adds.
"The MAS has traditionally been an early mover in Asia in both directions of the monetary policy, but perhaps not this time around. The MAS is facing a delicate balance between the still-elevated core inflation and a sharply slowing economy," she continues.
