Singapore’s inflation rises to 5.4% in July

Singapore's CPI inflation rose unexpectedly to 5.4% y-o-y in July, vs. 5.2% in June, driven by costlier housing, transport and food. Moreover, core inflation pressures are still holding up. However, inflation pressures could come off a bit to the extent the global economic headwinds gather further pace in the months ahead.

Facts
July CPI inflation rose unexpectedly to 5.4% y-o-y, vs. 5.2% in June, coming in above consensus and our forecast of 5%. Annual inflation rose for most categories, except for 'communications' and 'clothing & footwear'.

On a seasonally adjusted basis, CPI accelerated 0.6% m/m sa (vs. 0.4% in June), and rose sharply on a 3m/3m SAAR basis (5.0% vs. 3.2% in June). In non-seasonally adjusted terms, headline CPI inflation rose 1.5% m/m (vs. 0.2% decline in June), led by housing, transport and food. Housing was dearer due to increase in imputed rent for owner occupied dwellings and transport rose due to pricier certificates of entitlements.

Core inflation, excluding food and energy, remained flat at 4.6% y-o-y in July. On a sequential basis, core inflation rose 0.4% on an m/m sa basis (vs. 0.5% in June) and jumped on a 3m/3m SAAR basis (6.9% vs. 5.4% in June). However, the core inflation number tracked by the MAS, which excludes costs of accommodation and private road transport, eased slightly to 2.2% y-o-y (vs. 2.3% in June) and dipped by -0.3% m/m sa (vs. 0.2% in June).

Implication
Inflation is still very much on the agenda in Singapore and today's number underscores the persistence of inflation pressures in the economy. It's quite clear that the moderation we have seen in export growth in recent months has yet to ease domestic demand sufficiently to materially lessen the very tight capacity constraints.

Of course, the deliberate policy of limiting the supply of COEs does play a role, but the fact that car prices are still being bid up despite how expensive they now are is also testament to the solid domestic demand conditions. Moreover, domestic and foreign demand is remains strong enough to continue to lift housing prices. Finally, the inflation story extends beyond cars and houses, and the rising cost of living is also showing up in higher wage demands as tight labor markets leaves skilled labor in short demand.

Considering the dark clouds hanging over the global economy this, of course, presents a bit of a challenge for policy makers. However, to the extent the global economic cycle softens further in the months ahead, which seems increasingly likely, this would clearly have implications for Singapore's high-beta economy and likely also for core inflation pressures. The implication of this is that the MAS will likely not further tighten the monetary stance at the policy meeting in October, but much depends on the strength of the global headwinds at the time.

Bottom line: CPI inflation rose unexpectedly in July, reflecting the still strong domestic demand conditions. However, inflation pressures could come off a bit in the months ahead to the extent global economic headwinds gather further pace.