MAS, MTI: Core inflation negative in February as COVID-19 battered services sector

Due to the fall in the cost of services, primarily holiday expenses and airfares during the COVID-19 outbreak, Singapore’s core inflation was negative in February for the first time in over 10 years.

Based on the Department of Statistics consumer price index (CPI) figures released on Monday (23 March), the headline or all-items inflation was 0.3 per cent year-on-year, which was just below economists’ forecasts of 0.4 per cent while also being lower than the 0.8 per cent in January.

However, the Monetary Authority of Singapore (MAS) core inflation measure was -0.1 per cent year-on-year, which was below economists’ forecast of 0.1 per cent and lower from the 0.3 per cent in January. The MAS core inflation measure does not include private road transport and accommodation.

January 2010 was the last time that core inflation had been negative at -0.5 per cent.

Both MAS and the Ministry of Trade and Industry (MTI) “will closely monitor price trends and assess the impact of the COVID‐19 outbreak on inflation”, as mentioned in their joint statement.

There is no updated forecast ranges for core or headline inflation provided by MAS and MTI. They stated that these will be released in April by MAS in its upcoming Monetary Policy Statement. For both core and headline inflation in 2020, the previous official forecast range was between 0.5 per cent to 1.5 per cent.

In February, services inflation saw a step decline from January’s 0.5 per cent to -0.4 per cent. This is due to the drop in holiday expenses and airfares. In addition, food inflation also declined from 1.7 per cent previously to 1.6 per cent.

Electricity and gas prices continued to drop, reaching -7.4 per cent last month compared to -8.1 per cent in January, although it was a slower fall. Also, the costs of retail and other goods fell 1 per cent, which was slower than the 1.4 per cent drop in January.

As for items not included in core inflation, accommodation costs increased 0.4 per cent last month, compared to 0.3 per cent in January, where housing rentals saw a stronger pickup. Private transport inflation dropped from 4.6 per cent in January, to 2.4 per cent last month. This is caused by a smaller increase in petrol and car prices.

Recalling the steep oil price fall in March, MAS and MTI stated, “In the quarters ahead, external sources of inflation are likely to remain benign, amid weak demand conditions and generally well‐supplied food and oil commodity markets.”

Both also remarked, “However, international measures to contain the COVID‐19 outbreak have led to supply chain disruptions, which could put some upward pressure on imported food prices.”

With the tourism and aviation being hard-hit by the pandemic, the prices of travel-related items could be lower in the CPI basket. Consumer demand has been constricted by the drop in visitor arrivals and self-distancing measures and so “any price increases for discretionary goods and services” will be capped.

This year will see weaker wage growth due to the impacted labour market conditions, and economic uncertainty amidst the pandemic will possibly dissuade companies from imposing cost increases on consumers, MAS and MTI concluded.