Commentary: There is much to cheer in Singapore’s fight against inflation

SINGAPORE: You may not be able to feel it yet, but the pressure on your wallet should start easing in the coming months. Your lunchtime chicken rice will still be getting costlier – but at a slower rate. And if you are lucky, the cost of a new shirt for your year-end festivities may even fall.
That is certainly what the macro data suggests. About three years after the Monetary Authority of Singapore (MAS) started tightening monetary policy to combat price rises, inflation looks to be coming down at last.
Singapore’s core inflation rate – which excludes accommodation and private road transport – eased to 2.9 per cent year-on-year in June, the lowest price increase since March 2022. Food inflation is moderating at 2.8 per cent, while prices are actually falling in several categories such as clothing and footwear.
And Singapore’s headline inflation – which covers everything – is falling faster than the core measure, coming in at 2.4 per cent in June compared with 3.1 per cent in May.
This came as private transport costs fell 0.7 per cent in June due to lower Certificate of Entitlement (COE) premiums and moderating petrol costs. Accommodation inflation also edged down due to a slower increase in rents.
These positive signs suggest that Singapore’s central bank is succeeding in curbing price pressures, with its carefully-tailored strengthening of the Singdollar’s exchange rate these past few years.
When examining the components of Consumer Price Index (CPI) at a more granular level, one would observe that price pressures are easing for the majority of goods and services, while sharper price increases mostly come from three categories.
These are administered prices and fees, such as the carbon tax hike, transport fee increases, and water tariffs; tourism-related services; and healthcare services.
For instance, prices in the recreation and culture component of the CPI rose 4.7 per cent in June, owing to supply constraints in the hospitality sector. With Singapore’s success in attracting tourists from all over the world, the prices of hotels and package tours are moving higher.
In fact, Singaporeans also contribute to inflation in the holiday expenses category when they travel overseas – for instance by driving up the costs of package tours purchased here.
As for healthcare, the costs are facing structural upward pressures. The demand for healthcare will keep on increasing with Singapore’s ageing population while there are supply constraints on the healthcare workforce including doctors and nurses.
Nonetheless, the government’s healthcare subsidies, preventive health initiatives such as Healthier SG, and the adoption of digitalisation such as telemedicine should provide some relief.
The detailed statistics show that Singapore’s remaining price pressures are not broad-based. The progress of easing inflation remains intact and in the right direction – just that it is masked by these three “acute” categories. We will see inflation drop further once the situation eases. 
While consumers might bristle at things getting more expensive, a situation of slowly and steadily rising prices is ideal for price stability and economic growth.
In Singapore, MAS does not publish an explicit inflation target. However, it has said that a core inflation rate of just under 2 per cent is consistent with overall price stability in the economy.
The target inflation rate of 2 per cent is also used by many overseas central banks as a general guideline.
If all things go well, we may be able to hit somewhat near the 2 per cent figure. After the encouraging June CPI print, the government left its core inflation forecast unchanged at 2.5 per cent to 3.5 per cent for this year. It lowered the overall inflation forecast to 2 per cent to 3 per cent – down from 2.5 per cent to 3.5 per cent previously.
However, it is not necessarily an indication that Singapore is completely out of the woods. After all, the forecast ranges show that authorities think inflation could even cross 3 per cent if certain events play out.
Being a small and open economy, Singapore is highly sensitive to international price fluctuations. The supply chain disruptions and surge in commodity prices due to COVID-19 and the Russia-Ukraine war were well-known external factors that sent inflation up in 2022 and 2023.
Nobody has a crystal ball on how the global situation will play out. Nonetheless, it is easy to see how any intensification of geopolitical tensions in the Middle East or a re-escalation of the Russian-Ukraine war could drive shipping rates and energy and commodities costs upward.  
Within Singapore, rising domestic labour costs – including wages – can result in higher prices for the products and services of the industries where workers are in demand, and ultimately lead to higher inflation.
On a structural basis, there is evidence of matching inefficiency in Singapore’s labour market, leading to an upward bias on wages. For instance, while big data and artificial intelligence are large growth areas, there is still a shortage of talent in these areas.
The average Singaporean worker – in tech or in fact any industry – would naturally want to be paid more. The key, however, is consistency and sustainability. Drastic salary rises, if not matched by increases in productivity, will risk leading to a wage-price spiral and worsen inflation. At the end of the day, it will do nobody or the economy any good.
The good news is that significant progress has been made in the fight against inflation. The bad news is that it is still too early to declare victory.
Your chicken rice prices could soon become more stable, but you should not count the chickens before they are hatched.
Alvin Liew is a senior economist at UOB.