Singapore: CPI print and underlying inflation pressure
- January’s CPI inflation miss masked Singapore’s broad-based upside price pressures
- Higher underlying inflation is probably better reflected by excluding the drag from accommodation
- Accommodation inflation to play catch-up to rapid market rental growth
- Headline inflation to be kept sticky at close to 6% in 2023
- Evident food inflation is hurting lower income households more
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Did January inflation miss the mark?
CPI inflation in January came in below expectation. With a 1%-pt hike in the GST taking effect in the month, market consensus expectation was for a higher 7.1% YoY reading. Yet, the eventual outcome was a marginal uptick to 6.6% YoY from 6.5% in Dec22.
The January headline miss likely masked some of the upside price pressures in Singapore, in our view. Food and transport items, which together account for ~38% of the entire CPI basket, came in at 8.1% YoY and 11.9% YoY in Jan23. Yet, the accommodation category, which accounts for ~22% of the CPI basket, registered just 5.0% YoY and held down the headline inflation print. Simply put, if not for the drag from accommodation, headline CPI inflation would have been higher.
In our opinion, inflation indices that exclude the “accommodation component” are probably more indicative of the underlying inflationary pressure. Specifically, CPI inflation excluding accommodation or imputed rentals on owner-occupied accommodation were indeed higher than the headline rate, coming in at close to 7% YoY in Jan. While accommodation CPI inflation continued to rise in Jan, it appeared to underrepresent the extent of price pressures brought about by the surge in residential property rental rates, and henceforth, creates the distortion in the headline CPI inflation (see next section).
Accommodation CPI inflation not reflective of market rental growth
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. 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.
Accommodation CPI inflation could rise further with the 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.
First, accommodation inflation would be driven higher by further upward adjustment of renewing rental leases to current buoyant rental prices amid continued rental demand but constrained supply dynamics. A similar situation was seen back in 2H11 to 1H12, where accommodation inflation stepped up to ~11% YoY as existing contracts were subsequently adjusted upwards to higher prevailing market rental rates.
Second, imputed rentals on owner-occupied accommodation would also have to catch up with actual residential property rental increases to better reflect the costs of households hypothetically consuming housing services, even though most households in Singapore do not actually pay rents, as they are largely homeowners.
As such, headline CPI inflation will remain sticky in the coming months. Although inflation is expected to ease throughout the course of the year, the pace of decline will be held back by the opposing rise in accommodation CPI inflation.
We expect headline and core CPI inflation to remain elevated at 5.8% and 4.0% in 2023 (vs 2010 to 2019 averages of 1.7% and 1.5%, and our previous forecast of 6.3% and 4.2%). The pace of price increase is already lifted by the transitory impact of the 1%-point increase in GST to 8% starting from Jan23, and factors including rising accommodation inflation, firm private transport costs, and wage pressures from a still-tight labour market would also continue to fuel domestic inflationary pressures.
Evident inflation in food, hitting lower income households more
Food inflation could be a problem. Food, which alone accounts for 21.1% of the overall CPI basket, has risen persistently since Mar22, picking up to 8.1% YoY in Jan23, mainly driven by a steep increase in food serving services prices. Jan’s food inflation print not only marked the fastest year-on-year increase since Aug08, 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.
Elevated and rising food inflation affects everyone, but disproportionately hurts the lower income households more due to their higher food expenditures vs other income groups. According to Singapore’s household expenditure survey (the latest as of 2017/18), all category of households tended to spend most of their expenditures on food, but more so for the lower income groups.
Tackling high inflation and helping Singaporeans cope with the higher cost of living was a key focus for Budget 2023 (see ‘Singapore Budget 2023: Balancing near and long-term priorities’). The enhancements to the GST voucher scheme and the Assurance package (up to SGD 9.6bn) in the budget will go a long way in providing Singaporeans, especially the lower income, with crucial support and enable them to tide through this difficult period (see table in PDF).
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