As Singapore’s core inflation cooled to 2.5% and headline inflation remained unchanged at 2.4% y-o-y in July, analysts have revised their inflation forecasts for the year.
RHB Bank Singapore analysts Barnabas Gan and Laalitha Raveenthar have downgraded their headline inflation forecast to 2.6% from 3.5% y-o-y; Maybank Securities Chua Hak Bin and Brian Lee maintained their forecasts for both core and headline inflation at 2.8% and 2.6% respectively; and UOB Group’s Alvin Liew keeps his core inflation forecast at 3.0%.
The Monetary Authority of Singapore (MAS) is expected to keep its current policy parameters unchanged for the year as Singapore’s robust economic growth and global inflation risk reduce the need for any policy adjustments, says Gan and Raveenthar from RHB.
The RHB Singapore dollar nominal effective exchange rate (S$NEER) model suggests that the S$NEER has weakened to around 1.46% above the midpoint from yesterday’s 1.54% handle, the analysts say. But policy parameters are deemed appropriate to ensure medium-term price stability.
“The prevailing rate of the appreciation of the policy band will restrain imported inflation and domestic cost pressures and ensure medium-term price stability. MAS will, therefore, maintain the prevailing rate of appreciation of the S$NEER policy band,” they say.
The RHB analysts evaluate inflation numbers for different sectors in the month. Singapore’s headline inflation print is primarily dragged by lower consumer price index (CPI) prices in volatile components, led by a slowdown in accommodation costs, they say.
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Private transportation prices are flattish, expanding at 0.64% m-o-m in July, against the fall of 1.54% m-o-m in June. The accommodation price also saw a decline of 1.25% m-o-m, likely due to the increase of housing rents at a moderate level.
“We think the headline inflation momentum will average 0.3% into 4Q2024, similar to the average m-o-m rate for the whole of 2023,” they say.
As such, RHB’s downgrade of their headline inflation forecasts is based on a muted inflation seen across the region and slower-than-expected inflation print on a year-to-date (ytd) basis.
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“We can see that global energy and most food commodity prices have remained relatively stable in recent months. The costs of imported intermediate and final manufactured goods in Singapore have also decreased broadly. Domestically, the rise in unit labour costs has moderated alongside the cooling labour market,” Gan and Raveenthar say.
The analysts expect Singapore's headline and core CPI to grow at 2.4% y-o-y and 2.6% y-o-y in 2H2024.
Meanwhile, the future inflation trajectory will depend on Singapore’s gross domestic product (GDP) growth in 2H2024, the potential boost in demand resulting from stronger-than-expected labour market conditions and the effects of higher global commodity and food prices.
Gan and Raveenthar continue to expect that Singapore’s imported inflation will increase steadily in the second half of 2024 due to rising commodity prices expected in the coming months.
They also expect core CPI, excluding private transportation and accommodation prices to stay sticky at between 2% to 2.5% throughout the year.
Likewise, Maybank’s Chua and Lee say that holiday expenses were the main driver of easing core inflation. They note that inflation was broadly lower across most categories led by services, but some other key services components have been slower to ease partly because labour supply remains tight.
With the broad stability in global food and energy prices, MAS’s S$NEER appreciation bias and subdued retail and F&B spending are putting a lid on domestic price pressures, says the analysts.
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“We think progress on disinflation opens the door for MAS to ease the S$NEER slope in January 2025, when both core and headline inflation will be comfortably below 2%,” they note.
Chua and Lee expect a second easing move for the rest of 2025, and as the impact of the 2024 goods and services tax (GST) hike drops out, they forecast average core inflation sliding to 1.8% (revised from 2%) in 2025, whilst headline inflation falls to 1.7% (revised from 1.8%).
The analysts also raise their GDP forecast growth to 2.4% in 2025 on the back of strong first half GDP growth and falling interest rates. They note that the economy will be underpinned by strength in the modern services sectors, and recovery in the manufacturing and trade-related sectors.
The projected decline in global interest rates should boost financial and real estate activities, they add.
Finally, UOB’s Liew says he remains concerned about the pickup in imported and external inflation in recent months.
In earlier reports, the analyst has argued that there was progress with Singapore’s core disinflation as exhibited by the leftward shift in its inflation distribution profile. “This seemingly stalled, because the easing of prices were not broad-based and had remained somewhat “acute” in three, non-mutually exclusive categories: administered prices/fees, tourism-related services and healthcare services,” he notes.
In the case of imported inflation, any reacceleration, particularly in the “food and live animals” component could hamper the progress of disinflation given food has a significant weight of 21.1% in the overall CPI basket, says Liew.
The analyst expects policy normalisation to commence in the October 2024 Monetary Policy Statement (MPS). He says that he continues to project core inflation to average 3% in 2024, and ease significantly to 1.6% in 2025 anchored by base effects, assuming no further exogenous shocks.
“We maintain our 2024 average headline inflation forecast at 2.5% (from 4.8% in 2023) as private transport inflation has softened materially owing to the larger certificate of entitlement supply year-to-date,” he says.
