Singapore inflation yet to peak with more MAS tightening expected. Straits Times 2022-07-27

Singapore inflation yet to peak with more MAS tightening expected

https://www.straitstimes.com/business/economy/singapore-inflation-yet-to-peak-with-more-mas-tightening-expected

For Subscribers

Singapore inflation yet to peak with more MAS tightening expected

Prices for goods and services will continue to trend up through the rest of the current quarter at the very least, say analysts. 

Ven Sreenivasan

Associate Editor

Published

2022-07-27

SINGAPORE - Singapore's inflation may have reached 13-year highs, but we are nowhere near the peak.

Analysts reckon that given the uncertainties on the geopolitical front such as the war in Ukraine, continuing supply chain issues, tight labour market and the lockdowns in China, prices for goods and services here will continue to trend up through the rest of the current quarter, at the very least.

"Inflation still hasn't peaked, but hopefully will do so by September or October," pointed out Selena Ling, chief economist and head of treasury research at OCBC Bank.

Data out on Monday (July 25) showed Singapore's annual inflation rate rose the highest since September 2008 to 6.7 per cent in June 2022, jumping from 5.6 per cent in May, as prices of food, transportation, housing and clothing surged.

Households whose incomes were in the top 20 per cent bracket saw a 6 per cent year-on-year increase in overall consumer prices during the period, while those in the lowest 20 per cent experienced a 4.2 per cent rise. The middle 60 per cent saw prices of their goods and services rise 4.9 per cent.

Across all households, the consumer price index (CPI) climbed 5.2 per cent year on year from January to June, higher than the 3.1 per cent increase in the second half of 2021.

"It looks like the upward (inflationary) pressure remains strong, " noted Suan Teck Kin, UOB's head of research. "Transport alone contributed to 3.4 per cent of the 6.7 per cent (CPI number)."

The bulk of the transport costs are related to costs of operation (read: fuel and fares) and costs of ownership (mainly soaring Certificate of Entitlement prices).

Rising inflation erodes the value of money and consumers' purchasing power. Economists point out that some segments of the society may be particularly vulnerable to the impact of inflation, especially if wages do not keep up with price rises.

Singapore's de-facto central bank, the Monetary Authority of Singapore (MAS), unlike other central banks like the US Federal Reserve, does not deal with inflation via interest rate adjustments.

Instead, what it does is allow the Singdollar to strengthen against the currencies of Singapore's trading partners in an attempt to dilute the impact of imported inflation.

Anticipating the inflationary spike, the MAS did an unexpected off-cycle tightening of its Singdollar policy earlier this month, and is likely to do another such move at its next scheduled review in October.

But analysts do not expect another off-cycle tightening for now.

"MAS still sounds very cautious about upside inflation risks in the short term, citing fresh commodity price shocks and the tight domestic labour market," Ms Ling said. "So we will have to wait and see, but it looks like another monetary policy tightening in October is likely."

Given that there seems to be no immediate resolution to the factors driving up prices, full year inflation in Singapore is likely to remain high.

"We've adjusted upwards our full year forecast to 6 per cent, from 5 per cent previously," said UOB's Mr Suan.

This is the top end of the official forecast for Singapore CPI.

So can anything douse the inflationary fire?

"With the recession fears in the market, maybe commodity prices will ease further," suggested Ms Ling. Some commodity prices have declined in response to the tightening of monetary policies, including oil and some metal prices.

Whether there will be a global recession remains open to debate. Many analysts expect a potential economic slowdown rather than an outright recession.

The Ministry of Trade and Industry said Singapore's GDP growth this year will likely come in at the lower half of its forecast range of 3 per cent to 5 per cent. But some economists in recent weeks have downgraded their forecasts to as low as 3 per cent.

Also, if prices remain high despite a recession or slowdown, a stagflation (stagnant growth coupled with inflation) could result, as was the case in the late 1970s and early 1980s.

Meanwhile all eyes are on the Federal Reserve's ongoing rate-setting meeting with the US central bank expected to announce another 75 basis points hike in its key lending rate to tamp down inflation running at 41-year highs. The Fed's rate announcement is due at 2am on Thursday, Singapore time.