Inflation forecast to be reviewed as consumer prices hit new highs

Singapore consumer prices climbed to new highs last month, prompting the Government to review its inflation forecasts for this year.

Prices are expected to rise this year as the ongoing economic recovery increases consumer demand. At the same time, economists expect Singapore to tighten its economic policy, resulting in a stronger Singapore dollar.

Last month, core inflation, which strips out accommodation and private transport costs, jumped to 2.1 per cent on a year-on-year basis - the highest since July 2014. The increase was driven by a steep rise in air travel costs.

Headline or overall inflation rose to 4 per cent, up from 3.8 per cent in November and the most since February 2013.

The Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) said the consumer price index (CPI) data "saw an upside surprise in airfares".

With the introduction of more vaccinated travel lane flights, actual airfares were progressively incorporated into the CPI, compared with the previous approach of ascribing a notional price to them. The December data reflected both higher base airfares as well as the additional costs of mandatory Covid-19 tests, the agencies said.

Apart from airfares, point-to-point transport service costs, and tuition and other fees also rose at a faster pace.

"There remains significant uncertainty surrounding the outlook for inflation in the near term, including from the costs of air travel and commodity prices such as for food and oil," said MAS and MTI. They said they were reviewing their inflation forecasts for this year.

The surprisingly high inflation in recent months comes on the back of an equally strong economic recovery last year when the Singapore economy expanded by about 7 per cent - the most in 11 years.

While the economy is forecast to expand at a slower pace of 3 per cent to 5 per cent this year, falling unemployment and rising wages are likely to keep domestic demand for goods and services up.

Meanwhile, transport bottlenecks worldwide will also keep pushing up imported inflation for Singapore. In addition, construction delays will keep accommodation costs firm and continue to support the headline inflation this year, said MAS and MTI.

As the domestic Covid-19 situation stabilises, consumer demand should strengthen and allow businesses to pass on rising import costs to consumers in the form of higher prices, they said.

Analysts said the stronger-than-expected inflation will reinforce speculation that the MAS will tighten its monetary policy. A stronger currency will lower the cost of imports.

The next monetary policy statement is due in April.

Ms Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, said: "At this juncture, the April policy tightening is already baked into market expectations, so the upside CPI surprises may be more a question of whether it would heighten speculation of faster or more aggressive tightening at the April policy statement."

While MAS and MTI expect inflation to start easing gradually towards the end of the year, analysts said commodity prices may turn out to be a wild card.

DBS Bank's chief economist Taimur Baig said the crude oil benchmark trading at around US$90 per barrel should start to ease, given that both Organisation of Petroleum Exporting Countries (Opec) and non-Opec nations are likely to raise production this year.

Dr Chua Hak Bin, senior economist at Maybank Kim Eng Research, said the recent floods in Malaysia may compound food price increases in the lead-up to Chinese New Year on Feb 1.