SINGAPORE – Consumer prices in Singapore are at a decade-high and projected to “pick up sharply” in the coming months according to the Monetary Authority of Singapore (MAS), as the trade-reliant city-state grapples with global supply constraints, soaring commodity prices and a tight domestic labor market.
For Singaporeans, this has meant higher household power bills and transportation costs, increased fees for services, as well as pricier chicken rice at hawker centers. With the island nation having eased nearly all Covid-19 curbs, the post-pandemic era is rapidly being defined by cost pressures on consumer-facing sectors.
Singapore’s central bank said global developments, in particular the Russia-Ukraine conflict, have worsened the external inflation outlook, leading it to forecast in its half-yearly macroeconomic review published on April 28 that core inflation will peak in the third quarter as energy price increases filter through to local electricity and gas tariffs.
The core inflation rate – MAS’ favored price measure – outpaced economist forecasts with a rise of 2.9% year-on-year in March, the sharpest increase since March 2012. Headline or overall inflation, which includes private transport and accommodation, rose to 5.4%, the fastest since April 2012, prompting MAS to revise its projections earlier this month.
Core inflation is officially projected to average 2.5% to 3.5% this year, up from the 2% to 3% projection made in January, while headline inflation is forecast to come in between 4.5% and 5.5%, up from the earlier range of 2.5% and 3.5%. The authority said underlying price pressures may only begin to ease towards the end of the year.
Singapore’s Finance Minister Lawrence Wong said earlier this month that it is “almost a certainty” that inflation will be higher for longer, and that the expansionary monetary policy relied on by central banks in the developed world to buffer their financial systems for more than a decade has likely reached its limits.
MAS is on the vanguard of central banks beginning to rein in loose monetary policies with a focus on containing spiraling inflation. The authority tightened its monetary stance on April 14, the third time it has done so in the past six months, building on policy moves in October 2021 and a surprise off-cycle adjustment in January 2022.
Rather than adjust interest rates, Singapore’s monetary policy is based on exchange rates. MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed band, known as the Nominal Effective Exchange Rate, or NEER.
To buffer the domestic economy from its high exposure to overseas price hikes, MAS has sought to strengthen the Singapore dollar against imported inflation by re-centering its policy band higher and raising the slope of the currency’s appreciation in its most recent policy move, the first time both tools have been used simultaneously since 2010.
Singapore has still managed to record economic growth, but gross domestic product (GDP) has moderated in the face of global inflationary headwinds and geopolitical strife. GDP grew 3.4% year-on-year in the first quarter of 2022, according to advance estimates, falling sharply from the 6.1% growth logged in the previous quarter.
“In short, the risks for both growth and inflation are weighed significantly on the downside,” said Wong in an April 18 speech delivered at the Peterson Institute for International Economics’ (PIIE) Macro Week in Washington DC, his first overseas trip since he was announced as heir apparent to Prime Minister Lee Hsien Loong earlier this month.
The politically-ascendant finance minister told a business forum in March that Singapore would likely continue to grow this year in line with its baseline assumption and projections, but could not “rule out more adverse situations or scenarios where potentially we enter a recession, or we start to experience stagflation-like conditions.”
“If things start to get worse in Ukraine and we see a huge impact on our economy or on inflation, we will certainly not hesitate to do more whether through fiscal or monetary policy,” said Wong, alluding to the more than S$100 billion (US$72.3 billion) spent within the last two years to cushion the economy from the impacts of the pandemic.
Song Seng Wun, an economist with CIMB Private Banking, said Singapore is currently experiencing “inflation from two sides” with “cost-push inflation” due to increases in the cost of wages and raw materials resulting from supply disruptions and “demand-pull inflation” arising from upward pressure on prices as Covid-19 restrictions fall away.
After two years of stringent pandemic controls, Singapore lifted group size limits at workplaces and gatherings and jettisoned social distancing rules on April 26. Rules for entering the city-state of 5.5 million were also eased, with pre-departure testing requirements for incoming travelers vaccinated against Covid-19 scrapped.
“How high both headline and core inflation go really depends on how factors on the ground pan out. Supply disruptions look set to persist and despite higher prices, pent-up demand remains. With in-person activities picking up, ‘revenge spending’ – whether it’s for F&B or just travel – appears likely to keep pressure on prices,” noted the economist.
“China still remains an important unknown variable in terms of supply disruption,” said Song, pointing to factory-shuttering lockdowns undertaken by Singapore’s largest trade partner. “If both Shanghai and Beijing are still being affected by lockdowns and Covid flare-ups, that may add on to supply chain woes and therefore prices.”
Singapore’s electronics-led non-oil domestic exports, a sector that proved crucial to sustaining growth amid the pandemic, grew in March for the 16th consecutive month, though expansion rates have cooled amid uncertainties with 7.7% year-on-year last month, slowing from the revised 9.4% growth in February and 17.6% increase in January.
Analysts believe prevailing conditions may dampen trade in the coming months, with domestic-oriented services and travel-related sectors projected to drive growth in 2022. MAS expects the economy to expand by 3% to 5% this year, in the absence of further disruptions from the Russian-Ukraine conflict or deterioration in the pandemic situation.
“Despite the higher base, we are starting to see growth figures normalizing out from the double-digit growth that we saw as the economy reopened and robust demand from a low base to things stabilizing now at a more normal range of low-to-mid single-digit growth. But it is growth nonetheless,” Song told Asia Times.
The MAS holds scheduled policy reviews twice a year, typically in April and October. A key question is whether the central bank will tighten its stance again in October or even conduct another off-cycle adjustment before then to steady the economy and stabilize prices, a possibility that economists do not rule out.
Oxford Economics head of India and Southeast Asia economics Priyanka Kishore and senior economist Sung Eun Jung said April’s tightening was “a more hawkish stance than we had expected,” and further appreciation of the local currency could occur “earlier than October if price pressures continue to be substantially strong in the near-term.”
The two economists forecast that headline inflation in Singapore will peak at an average of 4.6% in the third quarter, staying within official projections. In a research note, Oxford Economics estimated that second-quarter growth would soften despite a rebound in the services sector, resulting in a 3.3% full-year rise in GDP for 2022.
CIMB economist Song is more sanguine, forecasting that inflation would moderate by the second half of the year. “We’ll likely see prices moderate on a year-on-year basis, but they may not drop off as quickly as we want to see.” MAS would likely pursue an October policy move if growth forecasts or inflation forecasts are revised upwards, he added.
“We are still encouraged by the fact that external demand still remains fairly resilient. We all complain, but despite the challenges, we have still got growth. And because labor market conditions remain supportive, we still see spending and people still are now able to take the higher costs of goods and services in stride,” said Song.
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