Singapore core inflation negative for fifth straight month, at -0.2% in June

SINGAPORE'S core inflation stayed negative for the fifth straight month in June at -0.2 per cent year on year, unchanged from May, said the Department of Statistics consumer price index (CPI) figures on Thursday.

Both core and headline inflation figures for June were in line with economists' estimates. Headline inflation saw its third month in negative territory at -0.5 per cent year on year, compared with -0.8 per cent in May, mainly due to a smaller decline in private transport costs.

Private transport costs fell 4.4 per cent in June, slowing from May's 6.8 per cent decline. Accommodation inflation stayed positive and unchanged at 0.5 per cent.

Core inflation, which excludes private road transport and accommodation costs, stayed steady as a steeper drop in the cost of services was offset by higher food inflation, as well as smaller declines in the costs of retail and other goods, and electricity and gas.

"This is a familiar theme which is expected to continue," said ANZ head of Asia research Khoon Goh, as supply disruptions cause food prices to rise but consumer demand for retail goods remains low.

Uncertainty over jobs has made households cautious, which "will not only keep a lid on price increases for non-essential items, but is also likely to lead to further discounting to spur demand", he added. He expects core inflation to fall further to -0.4 per cent in the next two months, but does not see a deflationary threat.

Services costs fell 1 per cent, steepening from May's 0.8 per cent fall, due to larger estimated declines in holiday expenses and airfares amid the pandemic.

In contrast, food was the only core inflation category where inflation was positive, edging up to 2.3 per cent, from 2.2 per cent in May. But pressure on food prices may become less acute as global supply chain disruptions abate, said OCBC Bank head of treasury research and strategy Selena Ling.

While enhanced social distancing and hygiene measures could raise costs for firms, the amount of slack in the economy means firms will likely stay cautious about their ability to pass these costs on to consumers, she added.

The cost of retail and other goods declined 1.8 per cent, slowing from May's 2.3 per cent, due to a more gradual fall in prices of clothing and footwear, and telecommunications equipment.

UOB economist Barnabas Gan highlighted the loss of international tourism-led spending in segments such as personal effects, which saw the sixth straight month of price decline at -6.9 per cent, and jewellery and watches, down 3.1 per cent in its third month of decline.

Electricity and gas prices fell 3.9 per cent, slowing from the 4.6 per cent fall in May, as new subscriptions under the Open Electricity Market scheme slowed.

In a joint statement, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry maintained the exact same inflation outlook as in the previous month, expecting inflation to remain subdued.

"In the quarters ahead, external sources of inflation are likely to remain benign amid weak global demand conditions," they said, with oil prices to stay low though Covid-19-related supply chain disruptions could continue to put upward pressure on imported food prices.

At home, subdued economic sentiment and labour market weakness will dampen consumer demand. "Cost pressures are likely to remain low as some degree of spare capacity in the economy emerges," they said.

The official full-year forecast range for both core and headline inflation in 2020 remains at between -1 per cent and zero.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye think it remains unclear whether inflation has bottomed out, even though Phase Two of economic reopening began on June 19. Some prices that were unavailable during the circuit breaker, include air tickets and holiday expenses, might become available in July and show a larger-than-average drop, they said.

Wage cuts, job losses and border restrictions will likely keep services inflation in negative territory in the third quarter, they added, and inflation may turn mildly positive only in the late fourth quarter.

Economists have been expecting the MAS to hold foreign exchange policy steady at its next policy meeting in October. Said Mr Goh: "Further monetary policy easing, via a re-centring lower of the policy band, will only be on the table if there were a renewed downturn in economic activity."