Singapore’s faster inflation adds pressure to tighten policy

(June 23): Singapore's key inflation gauge accelerated for a third month to the fastest in almost 14 years, bolstering the case for further monetary policy tightening and stronger action to buffer consumers from the drag of rising prices.

The central bank's closely watched core inflation print, which excludes private transport and accommodation, rose by 3.6% from a year ago in May, according to a joint statement on Thursday (June 23) from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI). That pace, the fastest since December 2008, matches the median estimate in a Bloomberg survey, and compares with 3.3% in April.

The increase was due to inflation across food, services, retail goods and energy, they said in the statement. They also repeated a warning from last month that prices will pick up in the coming months before easing toward year end as external pressures recede, while flagging upside risk from geopolitical or pandemic-related snags.

The Singapore dollar was trading 0.2% weaker at S$1.3896 to the greenback as of 1.46pm local time. The benchmark stock index was 0.7% higher.

The city state's faster inflation underscores the challenge facing policymakers across the region to buffer vulnerable households and businesses still recovering from the pandemic.

In addition to sustained supply chain delays, Covid-19-related lockdowns in China and pricier commodities caused by Russia's invasion of Ukraine, Asian currencies have been sliding as the US Federal Reserve aggressively tightens policy, adding further inflation risks.

Irvin Seah, an economist at DBS Group Holdings Ltd, and Bloomberg Economics' Tamara Mast Henderson said Thursday's inflation figures point toward the possibility of an out-of-cycle policy tightening by the MAS before its next scheduled meeting in October.

"Today's reading has added more impetus for the MAS to act in the upcoming policy meeting" or even before, Seah said.

The MTI and MAS also reiterated their forecasts for the main price measures this year, seeing core at 2.5% to 3.5%, and the broader all-items gauge at 4.5% to 5.5%.

"The way things are tracking, those forecasts will probably need to be revised higher," said Khoon Goh, the head of Asia research at Australia & New Zealand Banking Group. "Further tightening by the MAS will be needed to dampen inflation pressure," he said, adding that he expects that move in October, rather than a unscheduled tightening.

The MAS, which uses foreign exchange rather than interest rates to set policy, has tightened settings three times in the last eight months, including a surprise move in January. As well, the government unveiled a S$1.5 billion (US$1.1 billion or about RM4.76 billion) support package on Tuesday to shield lower-income residents from the impact of higher costs.

"The expected sustained acceleration in core Consumer Price Index (CPI) points to further monetary policy tightening on the horizon," said Selena Ling, the head of treasury research and strategy at Oversea-Chinese Banking Corp (OCBC) in Singapore. "Risks still lean to the upside for now."

A majority of Singaporeans in a survey released this week by DBS Group said they expect inflation pressures to continue for the next year. As well, more than half of Singaporeans think the government is handling inflation "badly", according to a mid-May survey by Blackbox Research Pte Ltd.

The all-items CPI gained 5.6%, compared with a median estimate of 5.5% in a Bloomberg survey, and 5.4% the previous month. That's the fastest since November 2011.