Oil prices to push inflation further in 2018: analysts

They think there’s no more room for monetary tightening in October.

Singapore core inflation in July rose by 0.6% from last year’s figures, whilst core inflation inched up 1.9% YoY in July from 1.7% in June amidst price hikes in electricity and gas.

RHB Research noted that inflation has been trending higher due to the costs of electricity and gas which are still rising. For the rest of the year, the team expects higher CPI due to imported inflation following elevated commodity prices.

“Global food commodity prices are projected to rise slightly, as global demand strengthens amid ample supply conditions. On the domestic front, inflationary pressure is expected to increase in tandem with the rising wage growth and domestic demand,” they said.

Robert Carnell, chief economist head of research, Asia-Pacific, at ING, noted that despite the unfurling trade war, Singapore's run of data has been a bit better than they had expected. This includes inflation figures in July.

“At the end of July, Industrial production surprised on the upside, retail sales weren't bad, Q2 GDP was a slight miss, but is more about the past than the present, so we will ignore that (conveniently), and non-oil domestic exports (NODX) were also decent. 3Q2018 has started well, and from a reasonable 2Q2018 base,” he said.

UOB economist Francis Tan commented, “With Brent crude oil prices moving higher, the risk is biased towards higher, rather than lower, inflationary environment in Singapore in the months ahead. Cost-push type of inflation (rather than a demand-pull type of inflation) due to higher international oil prices will only mean lower purchasing power for Singaporeans.”

This means that the rising oil prices will only mean lower purchasing power for Singaporeans. “That said, although crude oil prices are higher this year compared to last year, we do not expect it to be substantially higher as it will likely trend in the US$70-80 range over the next four quarters,” Tan added.

UOB maintained its 2018 core and headline inflation forecasts at an average of 1.5% and 0.6%, respectively. RHB Research expects inflation to hit 1.3% in 2018 compared to 0.6% in 2017.

Meanwhile, the analysts have all agreed that a monetary tightening in October is unlikely.

RHB Research expects the Monetary Authority of Singapore (MAS) to maintain the status quo in the next review after increasing the SGD nominal effective exchange rate (S$NEER) slope in April. “This is consistent with a modest and gradual appreciation path of the S$NEER policy band,” they said.

Carnell also does not expect the MAS to tighten policy any further. However, “with growth and inflation data holding firm in recent months, the balance of risks has shifted back slightly towards more tightening,” he added.

If nothing else were changing, we might be sympathetic to some more tightening by the MAS at the October meeting, Carnell noted. “But the global economic outlook is far from clear, and with the only other Asia economies tightening being those under FX depreciation pressure (Singapore dollar has been one of the regions outperformers since April), the rationale for stepping up tightening again seems poor,” he added.

Tan, on the other hand, thinks the MAS will be cautious and maintain the current monetary policy stance of a “slight increase in the slope of the S$NEER policy band” fueled by their belief that inflation expectations will be unchanged and that ongoing trade concerns could slow down global economic growth in the months ahead.