Core inflation could slow in 2H2023; MAS to hold in Oct meeting: analysts

RHB economist Barnabas Gan expects that core inflation momentum will decline to 0.1% to 0.2% m-o-m in 4Q2023.

Singapore’s inflation momentum could slow in the second half of 2023, according to RHB Group Research economist Barnabas Gan.

He expects that core inflation momentum will decline to 0.1% to 0.2% m-o-m in 4Q2023, in line with long-term averages from 2010 to 2019.

For April, headline inflation accelerated to 5.7% y-o-y — slightly higher than Gan’s forecast for the month of 5.5% — while core inflation flatlined at 5.0%.

Consumer price inflation (CPI) was supported by increases in food and transport of 7.1% and 8.6% y-o-y, respectively, while higher inbound tourism levels could also have also supported recreation and culture prices which saw an increase of 7.6% y-o-y, says the economist.

On the other hand, domestic-led inflation stayed sticky, as was apparent in healthcare, which recorded inflation levels of 4.2% in April, up slightly from 4.0% in March, while education and communication stayed flat across the two months at 3.0% and 2.7%, respectively.

According to Maybank Economics Research analysts Chua Hak Bin and Lee Ju Ye, the pick up in headline inflation picked up mainly on the back of a faster increase in private transport costs.

Meanwhile, core inflation was unchanged from March as the increase in costs of travel-related services offset the easing in prices of electricity and gas, food, and retail and other goods.

“We expect core inflation to remain sticky and fall slowly mainly due to domestic price pressures including the tight labour market, 1% goods and services tax (GST) hike and expansion of the Progressive Wage Model to larger sectors, including food services, waste management and occupational on March 1,” they say.

Services costs accelerated in April, with inflation increasing to 4.3% from 3.4% in March, mainly on the back of airfares which rose 3.1% from a year ago. “The rise in airfares was partly due to a less favourable base last April when Covid-19 testing requirements were relaxed with the introduction of the Vaccinated Travel Framework, but also reflects a 3.2% m-o-m price increase,” say the analysts.

Meanwhile, holiday expenses picked up to their fastest pace of 11.2% in April since December 2023, while rising 3.2% from the previous month, indicating that demand for outbound travel remains robust.

Electricity and gas inflation decelerated in April to 2.7% compared to the 12.2% recorded in March, due to a smaller increase in electricity costs and a decline in gas prices.

Inflation for retail and other goods also edged down to 2.9% in April, from 3.3% in March, as prices of household durables and clothing and footwear moderated, while personal effects declined.

Food inflation eased to 7.1% in April compared to 7.7% in the preceding month, but food prices increased by 0.3%. Prices of non-cooked food slowed due to a broad moderation across most products, in particular dairy products, meat, vegetables and fish and seafood.

According to the analysts, the UN Food and Agriculture Organization’s (FAO) food price index plunged by 19.7% in April from a year ago, down from its high base of Russia's initial invasion of Ukraine last year.

Although RHB’s Gan expects Singapore’s inflation momentum to ease further into 2023, he cautions that near-term inflation pressures could stay sticky given sequentially higher agricultural prices, albeit declining overall commodity prices on a y-o-y basis.

“Notably, weather experts cited an 80% chance for an El Nino to occur between July and September this year, suggesting some upside risks to agricultural prices in the immediate months ahead should harvest supplies be threatened by poor weather conditions,” he adds.

Hiking cycle ‘over’

Beyond easing supply-push inflation in 2023, Gan also expects demand-pull inflation to slow in the near term. RHB’s proprietary Singapore private consumption research function suggests that private consumption will see a potential soft landing in 2Q2023.

The economist says that he has observed that risks of a technical recession — defined as two consecutive quarters of negative growth — have magnified in 1H2023.

Singapore’s gross domestic product (GDP) recorded a 0.7% q-o-q seasonally adjusted dip for 1Q2023, the first instance of quarterly negative growth since 2Q2022.

“Still, we expect a recovery in Singapore’s private consumption in 2H2023. Discretionary consumer spending will outperform essentials spending in 2H2023 — we believe that an improvement in consumption expenditure in 2H2023 will uplift sales in discretionary products, typically motor vehicles, durables and luxury goods,” says Gan.

As a result, he has kept Singapore’s headline and core inflation forecasts both at 4.0% y-o-y for 2023, compared to official estimates of 5.5% to 6.5% and 3.5% to 4.5%, respectively.

Gan notes that he has observed that official language is sounding more dovish, citing “downside risks” to inflation on the back of a “sharper-than-projected downturn” in the advanced economies, in line with the recent Monetary Authority of Singapore (MAS) statement, which added that core inflation is expected to end the year “significantly lower” in 2023.

Core inflation stayed supported at 5.0% in April 2023, in line with the economist’s view for prices to stay sticky in 1H2023, he says.

Nonetheless, Gan expects core inflation momentum to slow to around 2.5% at end-year, accounting for the relatively stronger Singdollar nominal effective exchange rate (S$NEER) and gradually slowing commodity prices into the end of 2023.

According to him, the slowing inflation momentum seen year-to-date (ytd), coupled with the view that imported inflation risks will dissipate in 2023, reinforces his view that the MAS will keep its policy parameters unchanged in October 2023.

Gan believes Singapore’s hiking cycle is now “over” after five consecutive tightening moves since October 2021. He cites the latest MAS statement, in which policymakers said that the last five successive monetary policy tightening moves since October 2021 “have tempered the momentum of price increases” and are still “working through the economy”.

“MAS also cited that imported inflation is turning more negative, suggesting that a tightening via the S$NEER tool may not be necessary to curb supply-related price pressures,” he adds.

Similarly, Chua and Lee of Maybank say they expect the MAS to maintain its current appreciation stance at the October meeting, as core inflation decelerates in the second half of the year while growth comes in below trend. Maybank’s full-year GDP forecast is for 0.8% growth.

They have maintained their 2023 headline inflation forecast at 5.6%, near the lower end of the MAS’ headline inflation forecast range. Meanwhile, their 2023 core inflation forecast remains unchanged at 4.5%, at the upper limit of MAS’ forecast range.

“A potential recession and employment downturn may accelerate the easing in inflation pressures. Singapore may slip into a technical recession, if the boost from China’s reopening fails to materialise in the second quarter,” they say.

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