Inflation could stay high next year. What we’re doing to cope with more price increases.

TL;DR

• Consumer prices in Singapore have been rising more than expected with core inflation reaching 5.1% in August, the highest level in close to 14 years.
• More worryingly, MAS expects price increases to be persistent for the remaining of this year and into next year. 
• MAS has further tightened its monetary policy in an attempt to bring down price increases, following similar moves by Central Banks globally. 
• With the uncertain macro environment and worsening outlook, we’re looking out for safer investments which provide a good interest rate. The good news is that the yield on the 6-month Singapore treasury bill reach 3.77% per annum in the latest auction. 

What happened?

If you thought inflation this year is already very terok (serious), the bad news is that price increases will likely continue to be high next year. 

The Monetary Authority of Singapore (MAS) just released its projections that the headline inflation rate is expected to be 5.5-6.5% in 2023, close to the 6% increase expected this year. 

Excluding accommodation and private transport costs, core inflation is expected be at 3.5%-4.5% on average in 2023, again similar to the average expected for 2022.

More worryingly, the MAS believes that “risks are still tilted to the upside”. This means that if there’s any chance that their projection is wrong, then inflation is likely to be higher than the 6% forecast rather than lower. 

What we learnt from the MAS monetary policy statement

#1 – Inflation has been rising more than expected

Singapore’s headline inflation rate rose to 7.5% in August from 7.0% in July and 5.9% in the second quarter this year. 

Excluding private transport and accommodation costs, core inflation rose to 5.1% in August, the highest level in close to 14 years. 

It seems like almost everything has become more expensive compared to the previous year.

Driving to meet the friend you have not met since COVID? Transport costs rose by more than 20%. 

Eating out at your favourite hawker centre? Food costs rose by 6.4%.

Buying new clothes to refresh your wardrobe for work? Clothing and footwear costs rose by 8.7%.

Even recreation & culture costs rose by 5.9%! The only thing that has gotten cheaper – communication costs (thanks Singtel). 

#2 – Inflation expected to be persistent

More worryingly, MAS expects price increases to be persistent for the remaining of this year and into next year. 

For this year, a shortage of workers is expected to drive significant wage increases. 

Going into 2023, businesses are expected to face higher utility and raw material costs as they renew their contracts. 

While wage increases are expected to ease, they are still expected to remain above where they were in the past. 

And of course, there’s also going to be a GST increase.  

In case you’ve forgotten, GST will be increased from 7% to 8% with effect from 1 January 2023.

This 1.0 percentage point increase in GST will drive a one-off step up in the price-level, although the MAS expects its impact on inflation to be ‘transitory’.

The persistence in inflation is similar to what we’ve seen in the US CPI figures. 

Consumer prices in the US rose by 8.2% in September compared to the previous year, exceeding market expectations for inflation to be at 8.1%. 

#3 – MAS tightens monetary policy once again

With inflation expected to remain high over the next few quarters, MAS has further tightened its monetary policy in an attempt to bring down price increases.   

This is the 5th time that MAS has tightened its monetary policy since last year.

It will re-centre the mid-point of the S$NEER policy band up to its prevailing level, with no change to the slope and width of the band. 

What this is expected to do, is so strengthen the Singapore dollar relative to other currencies. 

Following the announcement by the MAS, we saw an immediate strengthening of the Singapore dollar relative to the US Dollar. 

Building on past tightening moves, this is expected to further reduce the impact of higher prices from goods and services imported from overseas. 

The tightening of monetary policy by the MAS follows the tightening by other central banks we have seen globally in the fight against inflation. 

In September, the US Federal Reserve (Fed) raised the benchmark interest rate by another 0.75 percentage point, bringing the interest rate to the highest level since early 2008. 

Following the higher than expected inflation in September, most economists are expecting the Fed to raise interest rates by another 0.75 percentage point again in November. 

What would Beansprout do?

To sum it up, MAS expects the global economy to face “high inflation and lower growth next year”.

Singapore’s GDP growth is expected to be below what we’re used to in the past, and there are risks that the economic environment could worsen further. 

Inflation is expected to stay high in the coming quarters, and prices could be climb more than the current projections.

This is consistent with our macro assessment in laying out our simulated portfolio for October 2022. 

With the uncertain macro-economic environment and worsening outlook, we are more defensive in our simulated portfolio with more holdings in bonds and cash. 

To be able to earn a higher interest rate, we’d buy the Singapore Savings Bonds and short-term Singapore treasury bills (t-bill) to hold to maturity.

And here’s the good news – the yield on the 6-month T-bill reached 3.77% per annum in the latest auction! 

While it’s not as high as what the inflation rate is, we think it’s still a good place to consider parking our spare cash!