MAS needs to step it up to contain core inflation: HSBC

Underlying demand-led pressures will join up with rising commodity prices to keep inflation readings on the high end for a while.

HSBC said, given the strong reading of inflation, the MAS will need to stay in tightening mode.

This was a surprisingly strong reading, which is also likely why the Statistics Department rather unusually made a specific reference to the MAS’s preferred core measure in an attempt to avoid a potential overreaction. However, excluding food and transport as a measure of core, underlying inflation is still up.

Of course much is driven by the deliberate policy of limiting the supply of COEs and, therefore, to some extent do not fully reflect underlying demand pressures. At the same time, the fact that COEs still get bid up and to the current lofty levels is a clear sign that underlying domestic demand is strong. These strong demand conditions, coupled with very low interest rates, are also continuing to push up housing prices, although the January macro-prudential measures to cool the property market may eventually have some impact. However, inflation goes beyond COEs and housing. It is broadening to other categories, including food.

Going forward, tight capacity constraints will translate into rising demand-led inflation pressures and higher core inflation, even as growth slows to more sustainable levels. Car prices are likely to remain high and it will be a while before the property cooling measures have an impact. There is also the risk that the elevated “non core” prices will have a second-order impact on core inflation through higher wage demands and other input cost spillovers. Coupled with rising international commodity prices, that means inflation will stay elevated for the foreseeable future.

In turn, the MAS will need to stay in tightening mode and the inflation outlook suggests that they will most likely need to tighten further in April to help tame inflation, likely through a re-centering.