SINGAPORE - Core inflation in Singapore continued its upward climb in May, driven by higher services inflation and a smaller decline in the cost of retail and other goods.
Core inflation, which excludes accommodation and private road transport costs, rose to 0.8 per cent on a year-on-year basis last month, up from the 0.6 per cent recorded in April. This is the fourth straight month that core inflation has risen, after spending a year in negative territory.
Meanwhile, overall inflation rose to 2.4 per cent, up from 2.1 per cent in April. This was on account of higher private transport and accommodation costs, said the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI), which released the data on Wednesday (June 23).
The inflation figures exceeded the expectations of economists polled by Bloomberg, who predicted core inflation to rise to 0.7 per cent and overall inflation to come in at 2.2 per cent.
The increase in both inflation indicators was partly due to the low base in May last year when circuit breaker measures were in place, MAS and MTI said.
UOB economist Barnabas Gan added: "Moreover, Singapore saw a persistent deflation environment in the period between April and November 2020, on the back of a relatively weaker economic environment and low oil prices then.
"As such, the rise of consumer prices may continue to be observed in the months ahead, although it is expected to be transitory when the base effects eventually dissipate."
MAS and MTI noted that external inflation has risen amid the recovery in global oil prices and turnaround in producer price inflation in the major economies. But the upward pressure on global inflation should ease in the latter part of this year, they said.
"Surplus oil production capacity should cap the extent of oil price increases, while continued negative output gaps in some of Singapore's major trading partners should moderate import price pressures."
Singapore's overall inflation is expected to remain elevated at around current rates in the near term, they noted.
Core inflation will continue to rise gradually, although the latest Covid-19 curbs in Singapore "could have an overall dampening effect on the pickup in underlying inflation", added MAS and MTI.
"In addition, uncertainty in the economic outlook will weigh on consumer sentiment and hence price increases in the near term."
For the year, wage growth is expected to be muted as slack in the labour market will take time to be fully absorbed, while commercial rents are projected to stay low, they added.
Meanwhile, private transport and accommodation costs should remain resilient on the back of firm demand for cars and rental accommodation.
Drilling down into the inflation data, private transport costs rose more sharply, surging 14.5 per cent in May, compared with the 12.9 per cent in April. This was largely due to a steeper increase in petrol prices, partly reflecting the low base in May last year when they saw a significant decline. Car prices also picked up at a faster pace.
Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye said: "We think rentals are partly driven by the return of overseas Singaporeans and permanent residents because of the pandemic. We think more than 50,000 Singaporeans may have returned home since January last year."
Services inflation picked up to 1.4 per cent, on the back of an increase in telecommunication services fees as well as higher point-to-point transport and health insurance inflation.
Accommodation inflation also edged up, to 0.9 per cent, as housing rents rose at a faster pace.
The cost of retail and other goods fell more gradually, at a decline of 0.8 per cent in May, compared with the drop of 1.1 per cent in April.
This was due to the price of household durables registering a larger increase, while that of clothing and footwear fell by a smaller extent, MAS and MTI said.
Food inflation remained unchanged at 1 per cent, as both non-cooked food and prepared meals inflation were broadly stable.
Electricity and gas prices fell at a slower pace, at a decline of 1.9 per cent, largely on account of the Open Electricity Market having a smaller dampening effect on electricity prices. There was a slowdown in new take-up rates, as well as a stronger pickup in gas prices, MAS and MTI said.
Overall, they noted that external inflation has risen amid the recovery in global oil prices and turnaround in producer price inflation in the major economies.
But the upward pressure on global inflation should ease in the latter part of this year, they said.
"Surplus oil production capacity should cap the extent of oil price increases, while continued negative output gaps in some of Singapore's major trading partners should moderate import price pressures."
At home, overall inflation is expected to remain elevated at around current rates in the near term, they noted, and ease in the second half of the year as base effects fade.
"MAS core inflation will continue to gradually increase, although the measures announced under phase two (heightened alert) and the continued restrictions under phase three (heightened alert) could have an overall dampening effect on the pickup in underlying inflation," they said.
"In addition, uncertainty in the economic outlook will weigh on consumer sentiment and hence price increases in the near term."
For the year as a whole, wage growth is expected to be muted as slack in the labour market will take time to be fully absorbed, while commercial rents are projected to stay low, they added.
Meanwhile, private transport and accommodation costs should remain resilient on the back of firm demand for cars and rental accommodation.
MAS and MTI maintained their inflation forecasts for the year. Core inflation for 2021 is expected to average 0 per cent to 1 per cent, while overall inflation is forecast to come in between 0.5 per cent and 1.5 per cent, they said.
