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Most economists expect core inflation to stay above 2% for 2022 after prices rose at fastest pace in 9 years

SINGAPORE — Most economists expect core inflation to hover above 2 per cent for the rest of the year, after Singapore recorded in January its highest year-on-year rise in this measure of the price of goods and services in almost a decade.

Core inflation, which excludes accommodation and transport, rose at its fastest pace in January 2022 since September 2012.
Core inflation, which excludes accommodation and transport, rose at its fastest pace in January 2022 since September 2012.
  • Most economists expect core inflation, which excludes accommodation and transport, to hover above 2 per cent for the rest of 2022
  • Singapore's year-on-year core inflation in January was 2.4 per cent, the highest since September 2012
  • MAS and MTI said this was driven by higher inflation for food, electricity and gas
  • Economists expect continuing domestic and global inflationary forces for most of 2022
  • They also foresee some impacts of recent Budget 2022 announcement on prices 

SINGAPORE — Most economists expect core inflation to hover above 2 per cent for the rest of the year, after Singapore recorded in January its highest year-on-year rise in this measure of the price of goods and services in almost a decade.

Core inflation, which excludes accommodation and transport because these can bounce around unpredictably, came in at 2.4 per cent for January, its highest level since September 2012. It was 2.1 per cent in December last year.

The data, released by the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) on Wednesday (Feb 23), showed that the headline consumer price index, or overall inflation, remained unchanged from December at 4 per cent.

MAS and MTI said that the higher core inflation was driven by faster rising prices of food, electricity and gas, as well as a slower pace of decline in the cost of retail and other goods.

Here are some of the key components of the consumer price index, which tracks overall or headline inflation:

  • Electricity and gas saw the steepest rise among all categories in January at 17.2 per cent year-on-year, owing to a jump in electricity and gas tariffs. The inflation rate for this category was 10.7 per cent in December
  • Transport jumped 12.7 per cent. It comprises private transport inflation (14 per cent, reflecting a smaller increase in car prices), public transport (4 per cent) and other transport services (18.9 per cent)
  • Housing and utilities inflation was 4.1 per cent year-on-year, comprising accommodation that rose 3.1 per cent, and utilities and other fuels, which jumped 11.8 per cent.
  • Food rose 2.6 per cent year-on-year in January, compared to 2.1 per cent in December
  • Communication prices went down 2 per cent year-on-year
  • Retail and other goods went down at a slightly slower rate of 0.3 per cent year-on-year in January, compared to a 0.7 per cent fall the previous month

OUTLOOK FOR 2022

MAS on Wednesday forecast core inflation for the whole of 2022 to average between 2 and 3 per cent, with headline inflation to come in between 2.5 per cent and 3.5 per cent.

The central bank and MTI said that global inflation has risen further recently and could stay high for some time before easing in the second half of the year. In the United States, inflation is running at 40-year highs.

Heightened geopolitical risks and tight supply conditions will keep crude oil prices elevated, they added.

Crude oil is at seven-year highs, approaching US$100 (S$134) a barrel, as tensions mount over Russia's invasion of Ukraine.

Bottlenecks in global transportation and labour shortages in a number of Singapore’s major trading partners are also likely to persist, they said.

At home, the labour market is expected to tighten and lead to stronger wage pressures over the course of the year, MTI and MAS said, with cost increases likely to filter through to higher services prices as consumer spending picks up.

We reiterate that both cost-push and demand-pull drivers such as higher global commodity prices, a tighter domestic labour market and the gradual reopening of Asia’s borders are strong drivers for higher inflation pressures for the year ahead.
Economist Barnabas Gan with United Overseas Bank

Senior economist at DBS bank Irvin Seah predicts that core inflation in 2022 will come in at 3 per cent, while overall inflation will be 3.8 per cent.

Mr Seah identified three factors that could drive up inflation: Rising global energy prices, pockets of supply chain disruption owing to the Covid-19 Omicron variant, and growing worldwide demand as the global economy recovers.

OCBC expects core inflation to exceed 3 per cent in the second quarter of 2022, before falling below that level in the second half of the year. It projects headline inflation to ease from near 4 per cent for the first half of this year, to around 3.5 per cent in the third quarter and 3.2 per cent by the end of year.

Ms Selena Ling, the bank's head of research and strategy, said: “This is partly due to higher base effects in the second half of 2022 but also in anticipation that some supply chain bottlenecks could resolve somewhat later this year.” 

On the other hand, economist Song Seng Wun from CIMB bank gave a lower projection for both headline and core inflation, due to a “lower base” comparison the previous year.

Mr Song predicts headline inflation to ease to about 2 per cent by this December, compared to January this year and December last year, which came in at 4 per cent.

He expects core inflation to hover around 2.5 per cent or higher in the first half of the year, before dropping to about 1.5 per cent or lower by December.

United Overseas Bank (UOB) pegs its outlook for core inflation for the year at 2.5 per cent and headline inflation at 3 per cent.

Economist Barnabas Gan from UOB said: “We reiterate that both cost-push and demand-pull drivers such as higher global commodity prices, a tighter domestic labour market and the gradual reopening of Asia’s borders are strong drivers for higher inflation pressures for the year ahead.”

IMPACT OF BUDGET ANNOUNCEMENTS

The analysts also expect key Budget announcements from last week to have a possible impact on prices this year.

Finance Minister Lawrence Wong announced a staggered Goods and Services Tax (GST) hike to 8 per cent beginning January next year, and again to 9 per cent from January 2024.

Ms Ling of OCBC said that any frontloading of purchases for big-ticket items before January 2023 to beat the GST hike may mean private consumption this year “should sustain”.

Mr Seah of DBS agreed that customers bringing forward purchases can drive up demand, but added: “Retailers may also place higher prices ahead of the GST (hike), because the GST may also affect some underlying costs for some of these companies.”

Changes to various foreign worker policies were also announced during the Budget, such as the raising of qualifying salary for those applying for an employment pass and S Pass.

This meant that the labour market here is “likely” to tighten, Ms Ling said.

Elaborating on this, Mr Song of CIMB said that the tightening of the labour market may drive wages inflation. Businesses may then pass on some of these costs, along with other rising costs, to consumers via prices.

Rising wages in a tightening labour market would also increase consumer’s ability to swallow higher prices, he added.

Ms Ling expects MAS to “likely to tighten monetary policy settings again” in its monetary policy statement in April this year, “given little short-term respite in the core inflationary pressures”.

“While MAS’ two pre-emptive tightening moves in October 2021 and January 2022 may help to mitigate imported inflation, many of the externally driven inflation catalysts are not within our control,” she added.

Mr Song, too, expects the central bank to "probably" tighten its policy.

Mr Gan from UOB calls for MAS to further normalise monetary policy in April, in view of of the “acceleration” of headline inflation as well as core inflation.

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MAS MTI inflation cost of living consumer economy Budget 2022

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