Oil, Not El Niño, Is Driving Singapore Inflation

(MENAFN- ING) Energy remains the main inflation story

Singapore's CPI inflation edged up to 2.3% YoY in August from 2.2% in July, while core inflation rose to 2.2% YoY from 2.0%, both broadly in line with expectations. Underlying price pressures strengthened more noticeably, with headline CPI increasing 0.6% MoM.

The acceleration in inflation was driven primarily by energy-related costs and their broader pass-through into transport, food, goods and services. Electricity inflation remained elevated at 9% YoY, while gas prices rose 6% YoY, reflecting higher energy costs. The firming in core inflation suggests that elevated oil prices are increasingly feeding into a wider range of components, particularly transport-related services, with airfares up 13% YoY.

Food inflation remained relatively elevated at 3% YoY, although there is still little evidence of a significant El Niño-driven shock. Price increases in key food categories such as cereals and vegetable oils have remained contained. That said, vegetable prices rose 4.2% YoY, a notable increase from around zero at the start of the year, warranting closer monitoring. Outside of energy-related categories, healthcare inflation remained relatively firm at 3.3% YoY.

Upside inflation risks keep October MAS meeting live

Looking ahead, we believe risks to the inflation outlook remain skewed to the upside and expect core inflation to accelerate further in the coming months. First, ongoing uncertainty surrounding the US-Iran conflict is likely to keep global energy prices elevated, raising the risk of further pass-through into domestic goods and services prices. Second, the growing risk of severe El Niño could push up imported food costs, adding to inflationary pressures given Singapore's heavy reliance on food imports. Third, Singapore continues to benefit from robust AI-related investment and data centre activity, which could sustain domestic demand and contribute to upward pressure on services inflation.

In July, the MAS surprised markets by increasing the slope of the SGD NEER policy band "very slightly", signalling greater concern about inflation risks than investors had anticipated. Continued acceleration in both headline and core inflation, coupled with persistent upside risks from energy, food and domestic demand, suggests the MAS may not be done tightening. As such, we believe the October policy meeting remains live and cannot rule out further modest policy tightening.

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