SINGAPORE — The lower-than-expected inflation rate in Singapore in recent months may be reflecting weaker business sentiment, as retailers and service providers are less willing to pass on higher wage costs to consumers amid the uncertain economic outlook, economists said yesterday.

However, the inflation rate should remain within Government forecasts in the coming months, barring a major economic shock, they said, as official data showed the consumer price index (CPI) dropping for the third straight month in August.

All-items CPI slowed to 0.9 per cent on a year-on-year basis last month from July’s 1.2 per cent — the lowest since February’s 0.4 per cent — because of a sharper decline in private-road transport costs, but services fees rose at a slower pace, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said yesterday when releasing the data.

This may indicate that businesses have held back from passing on higher wage costs to consumers, CIMB economist Song Seng Wun noted.

“Businesses are instead taking the cost pressure on the chin as the operating environment remains competitive,” he said. “As the economic outlook remains uncertain, companies may also become more selective with hiring. All these could lead to slower inflation.”

Reflecting this trend, services inflation dropped to 2.1 per cent last month from July’s 2.5 per cent, as categories such as recreation, education and holiday travel recorded lower gains.

As a result, core inflation — which excludes private-road transport and accommodation costs — dropped to 2.1 per cent from 2.2 per cent in July.

But economists do not expect full-year core inflation to drop below the official forecast of 2 to 3 per cent. Said Mr Song: “In the long term, Singapore’s full employment market will continue to support inflation. Barring a major external shock that hits demand for services and labour, I don’t see the core inflation rate dipping below 2 per cent for at least a year.”

The MAS and the MTI yesterday reaffirmed its full-year forecasts for both core and all-items CPI, despite the moderate pace in recent months, citing persistent domestic cost pressures stemming from a tight labour market. “All-items inflation is expected to remain subdued for the rest of 2014 due to the continued drag from imputed rentals and car prices,” they said, projecting a 1.5-to-2 per cent range for the overall CPI.

Last month, private-road transport costs — which accounts for 11.6 per cent of the CPI basket — fell by 2.9 per cent, accelerating from July’s 1.6 per cent decline, mainly as a result of lower Certificate of Entitlement premiums.

Economists expect the central bank to stand pat at its policy meeting next month.

“Despite easing headline price pressures … the MAS will likely continue to focus near-term policy on sticky core inflation in the context of labour market tightness and stable wage growth, and we expect the central bank to keep (exchange rate) policy settings unchanged at the upcoming October review,” JP Morgan economist Benjamin Shatil said.