Inflation hits four-year high. Should we be concerned?

Headline inflation hit a 4-year high of 1.3% in March, the highest since May 2017.

Inflation did not just hit the 1.0% mark in March, it went past it at 1.3%.

This is the highest since the 1.6% recorded in May 2017, and is a complete turnaround from the deflation experienced last year amidst the pandemic.

Inflation was driven by a faster increase in private transportation and services prices, barely tempered by a slowdown in retail & other goods and electricity & gas prices.

UOB Global Economics & Markets Research economist Barnabas Gan said the rise in inflation did not surprise, as global oil prices were higher in March.

"The rise in overall transport costs staged a multi-year high at +5.7% y/y, which was the steepest climb since March 2013 (+6.9% y/y). This was contributed by the increase in fuel costs (+10.6% y/y), point-to-point transport services (+5.7% y/y) as well as the rise in car (+10.0% y/y) and motorcycle (+26.3% y/y) costs," Gan said.

Analysts expect prices to continue to pick up in the coming months.

"The inflation outlook remains one where external pricing pressures will continue to rise in the near term amid the recovering global oil prices and decreasing capacity slack in major economies. In addition, domestic consumption is also stepping up to broaden the price pressures across more segments of the CPI basket," said Selena Ling, Head of Research and Strategy for OCBC Treasury Research.

Potential drivers for higher prices include the the recovery of global oil prices to pre-pandemic levels base effects from last year's deflation and higher electricity tariffs.

Despite improving headline and core inflation, which rose by 0.5% in March, analysts expect the Montary Authority of Singapore to keep monetary policy settings unchanged.

"We don't think rising inflation this year will warrant a tightening cycle to start in October 2021... Overall, we expect the MAS to start its tightening cycle in October 2022, but there is a notable risk that it will move in April 2022 if things improve faster-than-expected," said HSBC Global Research Economist Yun Liu.

All three analysts from these financial institutions noted that COVID-19 continues to be a source of uncertainty, given the rise of infection in several economies.