Analysts mixed but mostly keep 2024 forecasts after May’s inflation figures

MAS core inflation, which excludes accommodation and private transport and is the government’s preferred metric, rose by 3.1% y-o-y in May, unchanged from April. Higher inflation in the services sector was offset by lower inflation for electricity & gas, as well as retail & other goods.

Core inflation inched up by 0.1% on a m-o-m basis.

The headline and core inflation numbers stood in line with the forecasts of the Bloomberg consensus.

RHB Bank Singapore’s acting group chief economist & head of market research, Barnabas Gan, and associate research analyst Laalitha Raveenthar, expect Singapore’s inflation to remain sticky for now.

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“We think that global factors such as supply chain disruptions, geopolitical tensions, and adverse weather conditions could significantly drive up Singapore’s import costs causing inflationary pressures,” the analysts write in their June 24 report.

“As Singapore is heavily dependent on imported energy, any rise in global energy prices would directly translate to higher domestic energy costs. This increase impacts a broad range of economic activities, from manufacturing to transportation, thereby raising overall production costs and consumer prices,” they add.

Furthermore, Singapore would see higher import costs for essential food items, which would directly affect food inflation, considering the country imports over 90% of its food.

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This will make everyday food products more expensive for consumers, write Gan and Raveenthar, who add that higher shipping costs will also lead to higher prices of a large variety of imported goods spanning raw materials to finished products. As a result, businesses may pass these costs onto consumers, which will result in an overall rise in prices and a “more challenging inflation environment”.

“This ‘sticky’ inflation will eventually reduce household purchasing power and potentially spur a wage-price spiral,” note the analysts.

Singapore’s imported inflation, in particular, is likely to increase in 2H2024 on the back of higher commodity prices in the months ahead, say Gan and Raveenthar.

“We are already witnessing higher prices for food, energy, and metals in 2Q2024, which may pose upside risks to Singapore's imported inflation. Staples like rice and palm oil are experiencing accelerated price momentum, with further price increases likely due to ongoing El Niño weather conditions,” they write.

“Besides, higher retail prices, driven by concerts and international events attracting inbound tourists, are likely to persist in 1H2024. Strong consumer spending from these events contributes to inflationary pressures, as increased aggregate demand can exceed supply,” they add.

In 2H2024, the RHB analysts expect Singapore’s headline inflation to rise at 3.8% y-o-y, which supports their full-year projection of 3.5% y-o-y. Their core inflation forecast is kept at 2.8% y-o-y in 2024.

CGS International (CGSI) economists Nazmi Idrus and Song Seng Wun have kept their headline inflation forecast at 2.7% for 2024 despite the slight increase in May’s numbers.

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The economists see that private transport costs, which saw a “significant” pick up, could remain “sticky”.

In their view, the higher inflation, which came on the back of rising prices for cars and motorcycles, reflects the “resilient demand” for certificates of entitlements (COEs).

“Despite projecting a larger COE supply later this year, we expect private transport inflation to remain elevated as petrol prices continue to rise amidst continued volatility in crude oil prices – up 15.3% y-o-y so far in June (at US$85.12 or $115.33 versus June 2023 [at] US$73.85),” they write in their June 24 report.

The economists also see that food prices could face “upward pressure” in the 2H2024 with the subsidy rationalisation in Malaysia.

“Firstly, Singapore heavily relies on fresh food imports from Malaysia due to land scarcity. As such, the recent diesel price hike in Malaysia (from RM2.15 or 61.9 cents/litre to RM3.35/litre) could cascade into higher costs for food imports, likely leading to increase food prices,” they say.

“Besides, food prices worldwide have been seeing some volatility, as evidenced by the Bloomberg Commodity Index (BCOM Index) – this would also translate into higher input costs for food,” they add.

Both the economists at RHB and CGSI see that the MAS will keep its Singapore dollar nominal effective exchange rate (S$NEER) unchanged for the time being. RHB’s Gan and Raveenthar see MAS keeping its current monetary policy parameters throughout the year while CGSI’s Idrus and Song expects the central bank to adjust the S$NEER but not at its upcoming meeting in July.

Maybank Securities analysts Chua Hak Bin and Brian Lee also see Singapore’s core inflation remaining sticky as businesses continue to pass on costs from previous increases in labour, taxes and administrative prices such as water tariffs.

The analysts also note that travel services inflation remains elevated due to the “strong appetite” for revenge travel.

While they add that imported pressures have been easing from the broad stability in global food and energy prices as well as the MAS’s S$NEER appreciation bias, they see that global shipping disruptions and congestion at Singapore’s ports could pose upward risks to imported inflation if prolonged.

Their headline and core inflation forecasts remain unchanged at 2.8% and 2.6% respectively. The analysts also expect MAS to maintain its current appreciation stance at the July and October policy meetings.

DBS Group Research economist Chua Han Teng, on the other hand, sees that the underlying core disinflation dynamic remains “intact” despite the stead y-o-y core inflation.

“Other measures that we track such as core inflation in percentage m-o-m annualised change on a three-month moving average (3MMA) basis trended lower in May from its February peak,” Chua explains in his June 24 note.

Unlike his peers, Chua believes that Singapore’s y-o-y core inflation in 2024 will cool on average due to contained imported price pressures from manageable global commodity prices, ongoing strength in the Singapore dollar (SGD), as well as easing domestic cost pass-through.

“For example, a less tight labour market and moderate intentions by employers to raise wages (as seen from the Ministry of Manpower (MOM)’s forward-looking polls in the 1Q2024 advance release) would contain business cost pass-through to consumer prices,” he writes.

“Indeed, labour market tightness receded further in 1Q2024, with the job vacancies to unemployed persons ratio trending down to 1.56, the lowest since 1Q2021, from 2Q2022’s peak of 2.54, according to the MOM’s Labour Market Report 1Q2024,” he adds.