Inflation expectations for next year down to 3.11% in June

The slight tightening of Singapore’s monetary policy shaped expectations of cheaper prices.

Singaporeans may look forward to cheaper prices ahead as the One-year-Ahead median inflation expectations dropped to 3.11% in June 2018 in response to slight tightening of the monetary policy in Singapore, despite the potential of a trade war between US and other major economies, particularly China, a group from the Singapore Management University (SMU) revealed.

According to the Singapore Index of Inflation Expectations (SInDEx) by the Sim Kee Boon Institute for Financial Economics (SKBI), the current One-year-Ahead median headline inflation is still much lower than the historical median average of 3.43%. It is also marginally lower than the recent second quarter average of 3.17% for the one year ahead headline inflation expectations.

“Whilst the positive broad-based economic outlook on global growth is reassuring, there are certain factors that can dampen growth and drive up global prices both internationally and domestically in Singapore,” SKBI said.

The group first cited the June 2018 interest rate hike. “The prospect of faster than anticipated pace of normalisation of the US monetary policy under the leadership of the new Federal Reserve Board chair Jerome Powell might increase the volatility of global financial markets. A strengthening US dollar may also increase the burden of economies which are import-orientated, particularly given the price increase for various commodities accentuated by a steady recovery in global oil prices,” it said.

Second, the spectre of trade wars and potential of protectionist policies have not subsided, in fact a trade war is “flaring up” between the world’s two largest economies, US and China. This has also increased the risk in the financial markets and the prospect of higher unanticipated inflation expectations in the medium to long term.

Finally, on the domestic front, we highlight some factors that may have had an impact on inflation expectations.

SKBI also cited domestic factors that may have had an impact on inflation expectations. It noted that the higher slope of the S$NEER policy band might help counter the expected rise in the cost of US dollar-denominated imports such as oil and other commodities.

It also mentioned the “significant decline” in Certificate of Entitlement (COE) premiums to a multi-year low that might have had a downward impact on CPI-All Items Inflation without affecting MAS Core Inflation, which excludes accommodation and private road transportation costs. Improving labour market conditions might also have some uplifting effects on inflation as higher wages pass through to domestic prices.

Excluding accommodation and private road transportation related costs, the One-year-Ahead median Singapore core inflation expectations was recorded at 3.29% in June 2018, marginally lower from the March 2018 surveyed value of 3.30%. For a subgroup of the population who own their accommodation and use public transport, the One-year-Ahead median Singapore core inflation rate for the subgroup dropped to 3.19%.

This subgroup’s expectations of core inflation closely resembles the Singapore Core Inflation Expectations, as unlike the general population they are not exposed to private road transportation or accommodation expenses, SKBI said. “These results indicate that there seems to be a fairly stable but slightly subdued perception of future overall price changes representing the Singapore core inflation rate that excludes housing and private road transportation.”

SMU assistant professor of finance Aurobindo Ghosh commented, “The risk to global free trade with unilateral or retaliatory tariffs imposed pose a clear and present danger to price stability in the globalised economy. In academic literature, evidence shows unanticipated changes in inflation can adversely impact global financial markets and consequently the prospects of growth.

Ghosh noted that deliberate normalisation of monetary policy might not be effective in case where there are factors such as protectionist policies that can adversely affect prices and prospects of jobs and economies. “So far, inflation expectations of Singaporeans have been quite grounded after adjusting for behavioural bias; however, we cannot preclude the possibility of a surge in inflation if a full-fledged trade war amongst the major economies of the world is not averted through negotiations. In particular, the adverse impact of unhinged inflation expectations could be detrimental to global growth,” he added.