SINGAPORE - Singapore consumer prices climbed to new highs in December, beating economists' forecasts and prompting the Government to review its inflation forecasts for this year.

Core inflation, which strips out accommodation and private transport costs, jumped to 2.1 per cent last month on a year-on-year basis - the highest since July 2014 - from 1.6 per cent in November. The increase was driven by a steep increase in air travel costs, official data showed on Monday (Jan 24).

A Reuters poll of economists had forecast a 1.7 per cent increase.

Headline or overall inflation rose to 4 per cent, up from 3.8 per cent in November and the most since February 2013 when it surged 4.9 per cent.

The increase beat economists’ forecast of 3.75 per cent and was due mainly to the pickup in core inflation and bigger housing rent increases.

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 (VTL) flights, actual airfares were progressively incorporated into the CPI, compared with the previous approach of imputing them. December 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, contributing to the 2.6 per rise in the cost of services. 

"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.

"Given the recent stronger-than-projected inflation out-turns, including the sharp uptick in airfares", MAS and MTI said they are reviewing their current 2022 forecasts for both overall inflation and core inflation.

However, full-year 2021 core and overall came in exactly as MAS and MTI had forecast - 0.9 per cent and 2.3 per cent respectively.

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.

Wages are also rising because border restrictions have cut the supply of foreign labour, used by employers here to compensate for domestic shortages.

Meanwhile, transport bottlenecks worldwide will also keep pushing up imported inflation for Singapore, which brings in almost everything it consumes. 

The supply bottlenecks have been driving prices higher for a wide range of goods from crude oil to food and other products.

“Rising import and labour costs, alongside the recovery in domestic economic activity, will support a steady increase in core inflation in the quarters ahead,” MAS and MTI said.

In addition, construction delays will keep accommodation costs firm and continue to support the headline inflation in 2022, they noted.

“On the domestic front, the labour market recovery is expected to become more entrenched, with the easing of Covid-19 restrictions and a pickup in economic activity.”

Even as the domestic Covid-19 situation stabilises, consumer demand should strengthen, and allow businesses to pass on rising import costs to consumer prices, they said.

Analysts said the stronger-than-expected inflation will reinforce speculation that the MAS will tighten its monetary policy - strengthening the Singapore dollar versus currencies of its trading partners.

The next monetary policy statement (MPS) 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 MPS 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 upcoming April MPS.”

While MAS and MTI expect inflation to start easing gradually towards the end of the year, analysts said commodity prices - mainly oil and food - 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 Opec and non-Opec nations are likely to increase their production this year.

However, the ongoing tension between Russia and the West over Ukraine threatens supply from the region. On the other hand, China’s monetary policy easing could cause a spike in fuel demand from its massive industrial sector.

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.

Given the persistent inflationary pressures, Dr Chua expects MAS to raise its 2022 forecasts for headline inflation to a range of 2 per cent to 3 per cent and core inflation to 1.5 per cent to 2.5 per cent.

Analysts, however, do not expect runaway double-digit inflation in Singapore or elsewhere. They also do not see the current magnitude of price increases as a threat to the economic recovery.