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Singapore: Economists raise inflation forecasts after Sep core, headline inflation rates surprise on upside
SINGAPORE’S core and headline inflation rates edged up marginally in September, surprising private-sector economists who had expected them to hold steady, and prompting some to revise inflation forecasts upwards.
While the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) maintained their inflation forecasts for 2021 and 2022, their outlook has shifted towards expecting significant upward pressures, compared to the previous month’s report.
Headline inflation was 2.5 per cent, up from 2.4 per cent in August, while core inflation was 1.2 per cent, up from 1.1 per cent before, Department of Statistics (Singstat) consumer price index (CPI) figures showed on Monday.
Private-sector economists had expected both readings to hold steady.
Noting that core inflation had surprised slightly to the upside in August as well, Barclays economist Brian Tan raised his 2021 full-year forecasts to 0.8 per cent for core inflation, up from 0.7 per cent before, and 2.1 per cent for headline inflation, up from 1.9 per cent before.
For 2022, Barclays raised its full-year core and headline inflation forecasts to 1.7 per cent and 2.3 per cent respectively, up from 1.3 per cent and 1.5 per cent before.
“The increase in our headline inflation projections reflect not just our revised core inflation forecasts but also recent sharper-than-expected increase in car certificate of entitlement (COE) quota premiums, which will likely continue to climb as COE supply remains tight,” said Tan.
Maybank Kim Eng analysts Chua Hak Bin and Lee Ju Ye raised their 2021 headline inflation forecasts to 2 per cent, up from 1.8 per cent before, on the back of a stronger than expected rise in accommodation and private transport costs.
For 2022, they raised forecasts for headline and core inflation to 2.3 per cent and 1.6 per cent respectively, up from 1.5 per cent and 1.4 per cent before.
The higher forecasts are based on assumptions of persistently elevated food and energy costs; rising transport costs; adjustments in fees and fares in areas such as healthcare, education, public transport; and some pass-through from rising wage costs, they said.
September’s rise in core inflation, which excludes accommodation and private transport, was largely driven by higher food inflation of 1.6 per cent, up from 1.5 per cent in August.
Electricity and gas costs also rose more sharply, by 9.9 per cent compared to 9.7 per cent in August. Accommodation inflation picked up to 1.9 per cent, from 1.7 per cent before.
Inflation rates remained unchanged for services (1.2 per cent), private transport (10.8 per cent), and retail and other goods (-1.0 per cent).
“Excluding uncooked food, energy and the travel-related components, we estimate core inflation still edged up to 0.8 per cent year on year in September from 0.7 per cent in August,” said Barclays’ Tan.
While still low, this suggests that demand-pull inflation pressures may have persisted in September despite the surge in Covid-19 infections and tighter social distancing measures, he added.
Most Singstat expenditure categories, distinct from the MAS and MTI categories, saw positive inflation in September. The exceptions remained the same as in August: clothing and footwear (-5.0 per cent), communication (-2.2 per cent), and miscellaneous goods and services (-0.3 per cent).
In Monday’s release, the MAS and MTI’s inflation outlook shifted significantly towards expecting greater upward pressures, compared to the month before.
They noted that global inflation “has remained elevated, and is likely to persist for some time”, a contrast with their previous expectation that upward pressures on global inflation would ease.
Crude oil prices have risen on the back of the decision by the Organisation of the Petroleum Exporting Countries and its allies (Opec+) to keep supply increases modest, while demand for oil also picked up after global natural gas prices rose, they noted.
“The supply demand mismatch in various commodities and goods markets, as well as bottlenecks in global transportation, are likely to continue in the near term,” they added. And as economic recovery continues, underlying inflation in Singapore’s major trading partners should also gradually increase.
Domestically, the labour market recovery should continue, with wages expected to rise at a steady pace, and “consumer demand should pick up, allowing greater pass-through of accumulating business costs to consumer prices”.
“Rising imported and labour costs, alongside the recovery in domestic economic activity, will support a steady increase in core inflation in the quarters ahead,” they said.
As for headline inflation, they expect accommodation inflation to remain firm and continue to support headline inflation next year, amid construction delays. But private transport inflation is likely to moderate, with a slower pace of increase in COE premiums and petrol costs.
In its Oct 14 monetary policy statement, the MAS had embarked on a surprise tightening of policy settings in view of accumulating external and domestic cost pressures.
The slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band was raised slightly, while its width and mid-point were unchanged. This restored the S$NEER band to an appreciation path, from the previous flat slope.
The MAS said then that it expected core inflation to come in near the upper -end of the 0-1 per cent forecast range for 2021 as a whole, and to be 1-2 per cent in 2022. Headline inflation was expected to be 2 per cent in 2021, and to average 1.5-2.5 per cent in 2022.
The MAS and MTI maintained these expectations in Monday’s release.
The Maybank economists expect the MAS to maintain the “slight appreciation bias” at its next policy meeting in April 2022, as core inflation will likely remain within the MAS’ forecast in the first half.
But Tan expects further policy tightening in April. Barclays’ base case is an upward re-centring of the policy band by 50 to 100 basis points, and a further 50 basis points slope increase.
OCBC chief economist Selena Ling raised the question of whether the upcoming Budget 2022 could pose an upside risk to cost pressures, given the possible implementation of the planned good and services tax hike, potential wealth taxes, and a carbon tax hike.
This is in addition to earlier announcements about the expanded Progressive Wage Model and “hints of forthcoming price hikes for public transport, education and healthcare fees”, she said.
“If businesses continue to gain confidence to pass on their higher cumulative cost pressures to end-consumers, then it could also potentially spur a wage-price spiral although this is not our baseline scenario yet,” she said.
“Hence, the April 2022 monetary policy meeting remains a ‘live’ one in our view for a potential further steepening of the S$NEER slope if inflation dynamics materialise as expected.”
OCBC’s forecasts remain for headline CPI to be 1.9 per cent in 2021 and 2.0 per cent in 2022, and for core CPI to be 0.8 per cent in 2021 and 1.7 per cent in 2022.
Source: https://www.businesstimes.com.sg/government-economy/economists-raise-inflation-forecasts-after-sep-core-headline-inflation-rates