MAS sees inflation easing in second half of 2023; effect of GST hike 'transitory'

The 2023 inflation projections take into account the one-off impact of the GST increase, said the central bank. PHOTO: BERITA HARIAN

SINGAPORE - The Monetary Authority of Singapore (MAS) has given its first assessment of inflation in 2023, saying the pace of price increases will ease in the second half of next year and that the effect of the upcoming goods and services tax
hike should be “transitory”. 

Taking into account the one-off impact of the GST increase, core inflation should come in at around 3.5 per cent to 4.5 per cent over 2023, and headline inflation at 5.5 per cent to 6.5 per cent.

In comparison, core inflation, which excludes the costs of accommodation and private transport, is expected to average around 4 per cent this year, with headline inflation at around 6 per cent. 

However, without taking the goods and services tax into account, core inflation in 2023 would come in at 2.5 per cent to 3.5 per cent and headline inflation at 4.5 per cent to 5.5 per cent.

GST will be raised by 2 percentage points in two stages, from 7 per cent to 8 per cent on Jan 1 next year, and to 9 per cent on Jan 1, 2024.

“Although the 1 percentage point increase in the GST will result in a one-off step-up in the price level, its effect on inflation should be transitory,” MAS said on Friday in its biannual monetary policy statement.

"Overall, core inflation is expected to remain high in the first half of 2023 before slowing more discernibly in the second half as cost pressures gradually ease."

This is a revision of its earlier view that inflationary pressures would peak in the fourth quarter of 2022.

However, the central bank said there are upside risks to these forecasts, including from fresh shocks to global commodity prices and second-round effects, such as rising wages, associated with a prolonged period of high inflation.

"There is considerable uncertainty around the outlook for both inflation and growth," it added.

MAS said core inflation this year has risen more than expected, with the July to August average coming at 4.9 per cent year on year. This was up from 3.8 per cent in the second quarter.

Inflation for discretionary goods and services was the major contributor, amid robust demand conditions that supported the pass-through of higher imported and domestic costs.

Electricity and gas and non-cooked food inflation also rose, reflecting the effects of the step-up in global energy and agricultural input costs compared with a year ago.

At the same time, private transport and accommodation inflation accelerated, causing headline inflation to pick up to 7.3 per cent in the July to August period, from 5.9 per cent in the second quarter.

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The core inflation rate rose to 5.1 per cent in August on a year-on-year basis. Headline inflation rose to 7.5 per cent. Both measures were around their highest level since 2008.

Ms Selena Ling, chief economist at OCBC Bank, said the change in MAS’ inflation outlook would warrant further caution heading into the next scheduled April 2023 policy meeting.

“Inflation remains broad-based and sticky across a wide range of intermediate and final goods, while the tight labour market continues to support robust wage growth even as the return of foreign workers ramps up,” she added.

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