The Monetary Authority of Singapore (MAS) has said that core inflation is likely to stay around 5% for the rest of 2022, and into early 2023. Although the one percentage point increase in the Good & Service Tax (GST) will result in a one-off step-up in the price level, its effect on inflation should be transitory.
This was said with MAS’ latest monetary statement where it announced the fifth tightening of its monetary policy this year.
MAS expects that the global economy to face high inflation and lower growth next year. At the same time, MAS Core Inflation is expected to remain elevated over the next few quarters, with risks still tilted to the upside.
MAS has assessed that, on balance, a further tightening of monetary policy is needed to help ensure that price pressures are dampened over the next few quarters. Therefore, it will re-centre the mid-point of the S$NEER policy band up to its prevailing level. There will be no change to the slope and width of the band.
This policy shift by MAS, building on past tightening moves, will further reduce imported inflation by strengthening the Singapore dollar and help curb domestic cost pressures. The policy stance will help dampen inflation in the near term and ensure medium-term price stability, providing the basis for sustainable economic growth.
According to the data released by the Ministry of Trade and Industry, it is shown that global economic activity slowed in Q3 2022. Persistently high inflation and tighter financial conditions have begun to dampen private consumption and investment. The downturn in the global electronics industry has also weighed on a number of external-oriented Asian economies. Meanwhile, the pace of recovery has been muted in regional economies that have not fully re-opened.
MAS forecasts a slower pace of growth for the Singapore economy in tandem with weakening global demand. However, core inflation will stay elevated over the next few quarters, as imported inflation remains significant and a tight labour market supports strong wage increases.
MAS Core Inflation, which excludes the costs of accommodation and private transport, rose by more than expected in July–August, to 4.9% year-on-year, from 3.8% in Q2. Inflation for discretionary goods and services was the major contributor, amid robust demand conditions that supported the pass-through of higher imported and domestic costs.
Electricity & gas and non-cooked food inflation also rose, reflecting the effects of the step-up in global energy and agricultural input costs compared to a year ago. At the same time, private transport and accommodation inflation accelerated, causing CPI-All Items inflation to pick up to 7.3% July–August, from 5.9% in Q2.
For the rest of 2022, the confluence of demand and supply factors that drove the price increases in July–August is expected to persist. A tight domestic labour market will support robust wage increases, while imported inflation will remain significant across a range of intermediate and final goods.
In the coming year, costs pressures which have been accumulating along domestic and global supply chains will continue to pass through to consumer prices. Even as prices of energy and food commodities have moderated from their peaks, businesses will face higher utility and raw material costs as contracts are renewed. The pace of domestic unit labour cost increases should ease over the course of 2023, as labour demand and supply rebalance, but remain above its historical average.
MAS said that it will continue to closely monitor global and domestic economic developments, amid heightened uncertainty on both the inflation and growth fronts.
