Core inflation to remain in the red till end-2020

External pricing and imported food prices will be pressured by global factors.

Singapore is likely to stay in deflation for the rest of 2020 as it faces a triple whammy from falling domestic and tourism-led demand, and low oil prices over the same period, according to analyst notes from OCBC Investment Research (OIR) and UOB.

This follows after the Monetary Authority of Singapore and the Ministry of Trade and Industry revealed that Q2’s core inflation and CPI-all items dropped to -0.4% YoY in July, driven by a steeper decline in the cost of electricity and gas as well as lower food inflation.

UOB noted that it marked the fourth and sixth consecutive month of negative readings. Official outlook for both headline and core inflation has been kept unchanged at an average of between -1.0% and 0.0% in 2020.

Selena Ling, head of research and strategy at OIR, stated that external pricing pressures likely to stay benign amidst global recessionary conditions, crude oil prices are projected to remain soft for longer, whilst imported food prices may stay elevated amidst global supply chain disruptions.

As for the domestic economy, subdued consumer sentiments amidst the soft labour market conditions, coupled with existing slack in Singapore’s economy, should keep prices capped as firms find it difficult to pass on costs to end consumers.

UOB’s economist Barnabas Gan also adds that a downside risk is the resurgence of COVID-19 cases in some of Singapore’s key trading partners.

However, both Gan and Ling believe that recovery is slated for 2021.

“Rate of deflation could taper should Singapore’s tourism industry see some pickup following the recent easing of inbound travel restrictions,” Gan said.

He noted that authorities have recently allowed general travel from Brunei Darussalam and New Zealand via an Air Travel Pass (ATP), where application for the ATP will start from 1 September for travel from 8 September.

This is on top of past policies which established Reciprocal Green Lanes and Periodic Commuting Arrangement between Singapore and Malaysia, as well as with China via the “fast-lane” arrangement, where cross-border travel for essential business and official purposes will be allowed.