Why headline inflation will likely stay elevated in H2

DBS expects full-year headline inflation to hit 5.8%.

Singapore’s headline inflation will remain “sticky” in the coming months likely because of accommodation and food inflation, DBS said. 

In a report, DBS said accommodation inflation has distorted the headline CPI.

“Accommodation CPI inflation and residential rental price increases tend to be closely linked historically. Yet, the spread of accommodation CPI inflation with the year-on-year increases in the respective URA private residential and the SRX HDB residential indices reached double-digits in recent quarters, as the latter two indices surged, while the accommodation component within the CPI basket lagged,” DBS explained.

“We have observed historical episodes with such divergences, even though the drivers in previous residential property cycles were different from this cycle. In those instances, accommodation CPI inflation usually caught up to some extent with a lag,” DBS added.

Meanwhile, DBS noted that accommodation CPI inflation could rise further with “rapid increases in residential property rental rates of above 20% YoY in 4Q22.”

“The accommodation index could reach low double-digits growth as the year progresses, keeping headline CPI inflation elevated despite easing in other components in 2H23,” DBS said.

“Although inflation is expected to ease throughout the year, the pace of decline will be held back by the opposing rise in accommodation CPI inflation,” DBS added.
 
Food inflation could also be a problem moving forward said DBS.

“Food, which alone accounts for 21.1% of the overall CPI basket, has risen persistently since Mar 2022, picking up to 8.1% YoY in Jan 2023, mainly driven by a steep increase in food serving services prices,” DBS said.

“Jan’s food inflation print not only marked the fastest year-on-year increase since August 2008 but was also the largest rise when compared against other core CPI basket items. While other major components such as housing & utilities and transport have peaked and are showing clear signs of easing, food inflation continues to trend higher,” DBS added.

Given these factors, DBS expects the full-year headline CPI inflation to remain elevated at 5.8%.