Core inflation likely to be positive this year: MAS, MTI

It fell to minus 0.3% year on year last month, but may go up with projected rise in oil prices

Overall inflation is projected to be between minus 0.5 per cent and 0.5 per cent this year.
Overall inflation is projected to be between minus 0.5 per cent and 0.5 per cent this year. PHOTO: ST FILE

Core inflation is likely to go into positive territory this year, said the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) yesterday.

They said the projected rise in oil prices from a year ago should lead to a pickup in the oil-related components of the consumer price index (CPI).

The disinflationary effects of government subsidies introduced last year will also fade.

Core inflation, which excludes accommodation and private road transport costs, and overall inflation both averaged minus 0.2 per cent last year.

"Some components of domestic services inflation could also gradually increase, in tandem with the economic recovery," MAS and MTI said.

They forecast that core inflation will average 0 per cent to 1 per cent this year, while overall inflation is projected to be between minus 0.5 per cent and 0.5 per cent.

"However, the extent of the increase will be capped by persistent negative output gaps in Singapore's major trading partners. On the domestic front, cost pressures are expected to stay low, as wage growth and commercial rents are likely to remain subdued," they said.

Core consumer prices still fell last month, driven by a larger decline in services costs and lower food inflation, even as overall inflation posted its first non-negative print after nine months of deflation.

Core inflation fell to minus 0.3 per cent on a year-on-year basis last month, from minus 0.1 per cent last November.

Meanwhile, overall inflation came in at 0 per cent last month, up from minus 0.1 per cent the month before, primarily due to a rise in private transport costs, MAS and MTI said.

Private transport costs went up from minus 1.3 per cent in November to 1.2 per cent last month.

The cost of retail and other goods also fell at a slower pace to hit minus 1.2 per cent last month, easing from the minus 2 per cent in November.

This was due to smaller declines in the prices of clothing and footwear and personal care products, MAS and MTI said, coupled with an increase in the costs of recreational and cultural goods and telecommunications equipment.

Meanwhile, accommodation inflation remained unchanged last month at 0.3 per cent.

The cost of electricity and gas declined at a slightly slower rate, at minus 6.7 per cent last month, due to the easing of the take-up of new subscriptions under the Open Electricity Market.

On the other hand, food inflation dipped to 1.6 per cent last month, on account of smaller increases in the prices of non-cooked food and restaurant meals.

Costs of services fell more sharply, to minus 0.8 per cent last month, on the back of smaller increases in public transport fares and telecommunications service fees, as well as a steeper decline in tuition and other fees.

UOB economist Barnabas Gan said: "The continued lacklustre consumer demand coupled with the non-existent tourism spending and low oil prices continued to drag overall inflation."

Going forward, the gradual deployment of vaccines creates the general expectation that economic activity will resume and supply dislocations will reduce, noted Assistant Professor Aurobindo Ghosh of Singapore Management University.

"This would mean we can expect disinflationary pressures to reduce despite having muted imported inflation and oil prices, mainly due to increase in demand."

But Mr Gan cautioned: "The uncertainties surrounding Covid-19 and the negative impact it has on economic growth could inject some downside risks to our outlook. At this juncture, we are already observing that domestic cost pressures such as wage growth and commercial rent are subdued."

MAS and MTI said accommodation costs are also expected to fall as the decline in foreign employment will continue to weigh on rentals.

"In comparison, private transport costs could rise modestly on the back of improving demand."

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A version of this article appeared in the print edition of The Straits Times on January 26, 2021, with the headline Core inflation likely to be positive this year: MAS, MTI. Subscribe