Higher cost of services drives up inflation in March

Core inflation in Singapore continued to rebound in March, driven by costlier services and smaller price declines in some categories.

The rise came after inflation turned positive in February for the first time in a year.

Core inflation, which excludes accommodation and private road transport costs, rose to 0.5 per cent in March compared with the same month last year. It was 0.2 per cent in February.

Overall inflation also rose, hitting 1.3 per cent last month, from 0.7 per cent in February. The uptick reflected pricier private transport and the increase in core inflation, according to data released yesterday.

The Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) said domestic price pressures are likely to gradually pick up as the labour market improves and private consumption recovers.

Overall and core inflation are both forecast to rise in coming months, partly reflecting low-base effects from last year and stronger domestic demand, they said.

"However, inflation is unlikely to accelerate in the second half of 2021 as business cost pressures are contained. Wage growth is expected to be muted as the slack in the labour market will take time to be fully absorbed while commercial rents are projected to stay low."

Both MAS and MTI added that private transport and accommodation costs could remain elevated on the back of firm demand for cars and rental accommodation.

Private transport inflation surged to 7.2 per cent in March, up from 4.2 per cent the month before. This was due to a bigger rise in car prices and a turnaround in fuel costs that was partly boosted by a low-base effect as petrol became cheaper a year ago amid plunging oil prices.

Services costs also increased, from 0.5 per cent in February to 1.2 per cent last month, reflecting steeper rises in point-to-point transport services fees and health insurance premiums. Outpatient services fees rose in March as well.

Meanwhile, the prices of retail and other goods fell at a more gradual pace - minus 1.5 per cent in March compared with minus 1.9 per cent in February. Clothing, footwear and personal item prices saw smaller declines, while the cost of household durables rose more strongly.

Electricity and gas prices likewise declined at a slightly slower rate as the Open Electricity Market had a smaller dampening effect on power prices following a slowdown in new take-up rates.

They fell from minus 9.8 per cent in February to minus 9.7 per cent last month.

Food inflation dipped as the prices of non-cooked food and prepared meals rose at a more moderate pace of 1.4 per cent compared with 1.6 per cent in February.

Accommodation inflation was unchanged at 0.5 per cent as housing rents continued to rise at a steady pace.

MAS and MTI added that external inflation is expected to continue rising in the near term amid a recovery in oil prices and pricier raw goods and services in several major economies.

They added that the increase in global inflation should ease later this year as surplus oil production will likely cap rising oil prices, and spare capacity in some of Singapore's major trading partners keeps a lid on imported inflation.

Core inflation is expected to average between 0 per cent and 1 per cent this year, while overall inflation is forecast to come in at between 0.5 per cent and 1.5 per cent, according to official estimates.

UOB economist Barnabas Gan said the climb in prices has been relatively slow compared with the average increases between 2010 and 2019.

He added that inflation could rise as the effects of last year's government subsidies fade.

"However, the uncertainties surrounding Covid-19 remain pronounced, considering the rise in infection in several Asian economies, which could cloud the recovery momentum."