SINGAPORE - Core inflation in Singapore rose at the fastest pace in more than two years in August, lifted by higher food prices and a smaller decline in the cost of retail and other goods.

Core inflation, which excludes accommodation and private road transport costs, rose to 1.1 per cent on a year-on-year basis last month, up from 1 per cent in July, partly due to low base effects. This was the highest increase since the key indicator hit 1.1 per cent in June 2019.

Meanwhile, overall inflation eased slightly to 2.4 per cent, from 2.5 per cent in July, slightly above the average estimate of economists polled by Bloomberg.

The moderation reflected lower private transport inflation, which more than offset the rise in core inflation, said the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) on Thursday (Sept 23).

UOB economist Barnabas Gan said inflation risks appear balanced: "Upside risks may continue to be seen from the sustained strengthening of Singapore's economy, which in turn would translate into a tighter labour market and stronger consumer spending power."

However, increasing Covid-19 community cases in Singapore, coupled with spare capacity in some of Singapore's key trading partners, will likely cap price pressures in the months ahead, he added.

The bank has upgraded its overall inflation outlook to 1.8 per cent for 2021, compared with 1.4 per cent previously, while keeping its core inflation forecast unchanged at 1 per cent.

Maybank Kim Eng analysts Chua Hak Bin and Lee Ju Ye said ongoing supply chain disruptions will keep energy, food and freight costs elevated.

Accommodation costs will likely continue to climb due to factors such as recovery in foreign employment from the economic reopening, as well as disrupted supply of new housing due to foreign worker shortages, they said.

"Expansion of the Progressive Wage Model to the retail sector and introduction of the minimum local qualifying salary in September 2022 will also raise wage costs and services inflation," they added.

August's inflation data showed private transport costs rose at a slower pace of 10.8 per cent year on year, compared with 12.6 per cent in July, largely due to a smaller increase in car prices and decline in other private transport services costs.

Services inflation edged down to 1.2 per cent in August, compared with 1.3 per cent in July, mostly because of a steeper fall in telecommunication services fees.

Electricity and gas costs also rose at a slower pace - at 9.7 per cent - in August, down from 9.9 per cent the previous month, due to a smaller increase in gas prices.

However, accommodation inflation rose to 1.7 per cent, compared with 1.4 per cent in July, in line with the stronger pickup in housing rents.

Food inflation also climbed - to 1.5 per cent - in August, from 1.1 per cent in July, as the prices of non-cooked food and prepared meals saw larger increases.

The higher costs of non-cooked food was mainly due to a steeper increase in the cost of fruit.

The cost of retail and other goods fell at a more gradual pace of 1 per cent, compared with the 1.2 per cent decline in July, reflecting higher inflation for personal items and a smaller decline in the cost of personal care products.

In their statement, MAS and MTI noted that external inflation has remained elevated but has shown signs of moderating as base effects fade: "Upward pressures on global inflation should ease further over the course of the year."

They added that crude oil prices have declined recently due to concerns over the prospects for the global economy amid the spread of the more contagious Delta variant.

"The supply-demand mismatches in some goods markets, as well as bottlenecks in global transportation, are mainly transitory and should ease with the gradual recovery in production and logistics services," MAS and MTI said.

Spare capacity in some of Singapore's key trading partners should help to moderate overall import price inflation this year, they added.

Locally, lingering uncertainty as Singapore transitions to a "Covid-resilient state" could weigh on consumer sentiment and hence dampen domestic price increases in the near term, the agencies said.

"Wage increases should continue to be restrained, as the slack in the labour market, while diminishing, will take time to be fully absorbed," they said.

"Meanwhile, commercial rents are projected to stay low, capping overall business cost pressures. In comparison, private transport inflation is likely to remain resilient due to firm demand for cars. Accommodation inflation could continue to pick up over the course of the year on the back of strong demand for rental accommodation," said MAS and MTI.

Core inflation is expected to increase gradually in the coming months, while the likely pickup in accommodation inflation could result in a modest rise in overall inflation in the fourth quarter of 2021, they added.

Core inflation is officially forecast to average between 0 per cent and 1 per cent for the year, while overall inflation is predicted to come in between 1 per cent and 2 per cent.