News analysis
Singapore’s inflation problem is unlikely to dissipate any time soon
SINGAPORE – Signs that inflation is softening have been emerging recently, but the persistent pace of gains in core consumer prices means the crisis is far from over.
This environment of high prices – in Singapore and in other advanced economies – challenges the market consensus that lower inflation can be achieved without a recession and a jump in unemployment.
Singapore’s core consumer price index, which excludes private transport and accommodation costs, rose by 5.1 per cent in December – the third consecutive month of increase – data showed on Thursday.
While the inflation measure, which reflects the expenses of Singapore households more accurately, is down from its peak of 5.3 per cent in September, that is a moderate drop compared with the all-items headline inflation, which came in at 6.5 per cent in December, down from a peak of 7.5 per cent in August. The dissonance between the two measures shows that headline inflation is more reflective of import costs, which have been easing in line with global prices of energy and food commodities that have come off their peaks as supply chain bottlenecks eased while goods manufacturers built huge inventories.
Thus, the stubbornness of core inflation means that it is more sensitive to domestic price pressures such as the strength of discretionary demand for services and the tight labour market that has kept wage pressures strong.
Mr Gilles Moec, chief economist of French multinational AXA Group and head of research at AXA Investment Managers, said: “It is possible to see the current price configuration as a transitory lull where old, supply-driven inflationary forces are abating, and newer, demand-side forces, supported by a still-robust labour market, have not peaked yet.”
The Monetary Authority of Singapore (MAS) said as much in its commentary on the December consumer price data.
“Unit labour costs are expected to increase further in the near term alongside robust wage growth,” it said, adding that thus, “businesses are expected to continue to pass through accumulated import, labour and other costs to consumer prices amid resilient demand”.
Academic research shows that households’ perceived well-being is more adversely affected by a rise in unemployment than by an acceleration in prices. Most economists therefore believe that consumer demand will continue to hold even if wage growth lags behind the pace of price increases. Experts refer to this phenomenon as the price-wage loop, where wages catch up with rising prices and fuel further inflation.
“The resilience in purchasing power may delay the slowdown in consumption and economic activity needed to ensure that the labour market lands, and that a truly lasting disinflation sets up,” said Mr Moec.
Singapore is not alone in facing difficult policy choices to bring inflation to an acceptable level of around 2 per cent. In fact, the next leg of the war on inflation almost solely depends on what the United States Federal Reserve does, starting with its first 2023 interest rate decision meeting in early February.
Interest rates play a crucial role in dampening domestic price pressures. Given that Singapore has a currency-led monetary policy, interest rates here follow the lead of US rates. The MAS, after tightening its monetary policy at its fastest pace ever between October 2021 and October 2022, is probably running out of ammunition that it can throw at the stubbornly high inflation.
Most analysts now believe the MAS may go for one more tightening move at its scheduled meeting in April or even earlier – which basically means pushing the Singapore dollar up on a trade-weighted basis against other currencies.
However, a significant minority of experts say that a stronger currency may further weigh down the export-driven manufacturing sector, which has already started to shrink.
With exports in decline, Singapore’s overall economic growth is set to come in significantly lower in 2023 than the rate of expansion in the past two years.
The Ministry of Trade and Industry expects gross domestic product (GDP) growth to come in at 0.5 per cent to 2.5 per cent in 2023 – down from 3.8 per cent in 2022 and 7.6 per cent a year earlier.
The growth slowdown means the MAS cannot be as aggressive in fighting inflation as it was in 2022, when the economy expanded at a decent pace, said Mr Brian Tan, a senior regional economist at Barclays Bank in Singapore.
Mr Tan is among economists who believe there is less need for further tightening. However, he said, there is a small chance that the MAS may give a slight push to the trade-weighted Singapore dollar come April.
The move, he said, would be aimed at minimising the impact of the goods and services tax increase – which came into effect in January – on inflation expectations.
The Singapore Index of Inflation Expectations (Sindex), published jointly by DBS Bank and Singapore Management University, appears to be well anchored for now.
The latest Sindex findings released earlier in January showed a drop to 3.8 per cent in December from an 11-year high of 4.6 per cent in September.
However, Dr Taimur Baig, chief economist and managing director of group research at DBS, said: “Taking the survey results in totality, local inflation trends are largely reflecting global factors, with the ongoing respite, as welcome as it is, too little and too recent to suggest last year’s sharp inflation bout is conclusively over.”
The December inflation data shows that while globally influenced inflation in some items – such as electricity and gas – has eased, it is still growing by double digits.
The fact that prices are not falling but only rising at a slower pace is a worldwide phenomenon and shows the resilience in consumer demand pointed out by the MAS. Thus, some analysts stress the need for central banks – mainly the US Fed – to remain aggressive despite the signals that commodity prices may have peaked.
The Goldilocks scenario – where the Fed would engineer a soft landing – is now centred around hopes of a 25 basis-point increase in benchmark US interest rates.
That would be a profound reversal of the aggressive stance the central bank took in 2022, raising its rates from close to zero to 4.25 per cent in just nine months.
Although there have been encouraging signs of moderating price trends in the past three months, many analysts point to Fed chair Jerome Powell’s remarks that he wants to see a “sustained period of below-trend growth” to achieve his goal of bringing inflation back down to 2 per cent. But with US fourth-quarter gross domestic product growth coming in at 2.9 per cent, seen as above trend, the Fed may have a response the market would not like.
Ms Sue Trinh, co-head of global macro strategy at Canadian multinational Manulife Asset Management, said the impact of interest rate increases on the economy typically is not easily observable until 12 to 18 months later. “We are wary that the transmission of the current global tightening cycle has barely begun,” she said.
She noted that the aggressive pace of monetary tightening and its associated lagged effects should drive a synchronised global growth downturn in the first half of 2023 for disinflation to set in.
Slowing final demand from advanced economies, elevated inflation, and a still-strong US dollar will most likely morph into material headwinds for growth in the rest of the world, especially for emerging markets, Ms Trinh said.
While economic conditions may improve in the second half of 2023, the risk is that the stagflationary dynamics – low growth and elevated inflation – may extend into late 2023 or even early 2024, she said.
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