Near- and Medium-term Outlook for Inflation in Singapore and Steps to Mitigate Sharp Rise

Mr Saktiandi Supaat asked the Minister for Trade and Industry (a) whether the Ministry can provide an update on the risk of a sharp accumulation of external and domestic cost pressures affecting prices of goods and services in Singapore; and (b) other than tighter monetary policy, what steps can be taken to mitigate some of the effects of rising costs over the next 12 months.

CPI-All Items inflation picked up to 2.5% on a year-on-year basis in Q32021, from 2.3% in Q2. The rise in domestic inflation came largely on the back of higher external inflation due to increases in global energy and food commodity prices, and persistent supply bottlenecks in key global industries and transport hubs.

On the energy front, crude oil prices have risen to above US$80 per barrel since early October on account of the decision by OPEC+ to keep supply increases modest, even as oil demand continues to pick up due to the global economic recovery and the rally in global natural gas prices. Higher oil and gas prices will translate to higher electricity prices domestically. And about 95% of our electricity is currently generated using natural gas. That is on the energy front.

On the food front, global prices for food commodities such as cereals and vegetable oil have risen due to supply constraints arising from weather-related disruptions, manpower and labour shortages and export restrictions in key food-producing countries, amidst rising global demand. Higher global food prices will in turn, naturally, exert upward pressure on domestic food prices.

Meanwhile, supply bottlenecks for goods such as semiconductors, and congestion at ports around the world, have contributed to a rise in the prices of imported consumer goods in Singapore.

Domestically, we expect labour costs to rise as the labour market continues to recover and border restrictions limit non-resident worker inflow. We also expect to see inflation in accommodation to persist due to strong rental demand for housing amidst construction delays caused by labour shortages in the construction sector. Against this backdrop, CPI-All Items inflation is projected to come in at around 2% this year and average 1.5% to 2.5% in 2022.

But despite this rise in inflation, Singapore’s economic recovery for the year remains on track. Barring a major setback in the global economy, GDP growth is expected to come in between 6% and 7% for the full year, mainly supported by outward-oriented sectors, such as the manufacturing, finance and insurance, and information and communications sectors.

The Government recognises that higher inflation is a cause of concern for Singaporeans, particularly those in lower-income households. To manage the cost of living pressures faced by Singaporeans, the Government adopts a multi-pronged approach.

First, in view of the external and domestic cost pressures, MAS recently announced a shift towards an appreciating path for the trade-weighted Singapore dollar – the Singapore dollar nominal effective exchange rate. A strong Singapore dollar will help to mitigate imported inflation and temper domestic cost, to ensure price stability over the medium term. That is one.

Second, the Government strives to maintain and manage domestic supply-side constraints, and these include the supply of industrial and commercial spaces to help moderate business cost increases, and reduce the knock-on impact on consumer prices. During the pandemic, the Government has also disbursed rental relief to help businesses cope with their rental costs. In addition, policy measures, such as the Wage Credit Scheme, Jobs Support Scheme and Jobs Growth Incentive Scheme, provide some support for businesses in terms of their manpower and labour costs.

Third, to mitigate the impact of rising global food prices, the Government has diversified our food import sources to help ensure that the prices of our food supplies remain competitive.

Fourth, we will continue to pay particular attention to Singaporeans from lower-income households who need support for their basic living expenses. The Government will continue to provide assistance through ComCare and the permanent GST Voucher scheme. From time to time, the Government also introduces one-off support measures, such as the Budget 2020 Grocery Vouchers Scheme. In addition, Singaporeans from lower- to middle-income households who have experienced involuntary job or income loss due to the economic impact of COVID-19 can apply for financial assistance provided through schemes, such as the COVID-19 Recovery Grant and the Courage Fund.

The Government will continue to monitor inflation and cost of living pressures closely and adjust our policies where necessary.

Mr Speaker, I would like to thank the Minister of State for his detailed answers. I have just one supplementary question and somewhat related to Question No 5 as well. Beyond the mitigation measures that the Minister of State mentioned just now – we are thankful for the support for expenses and other mitigation measures – can he give an update on other pre-emptive efforts?

For example, the Retail Price Watch Group (RPWG). An update on that would be quite useful. Slightly more than a decade ago, we created that to keep a watch on retail prices and address concerns on any alleged profiteering and excessive pricing of daily necessities and food items. And the role of cooperation with retailers going forward, as a price stabiliser, I think that element of pre-emptive efforts might be useful at this point in time as we proceed into 2022. If we can have further updates from the Minister of State, please.

I thank the Member for his supplementary question. The Government maintains a very strong vigilant stance on price increases and price fluctuations. The Retail Price Watch Group that the Member mentioned has stood down but we have other measures and ways of monitoring the price of goods. For daily necessities, consumers can make use of CASE's Price Kaki app to compare prices of groceries and hawker food to help them to make more informed purchasing decisions.

To also help Singaporeans cope with higher prices for their daily necessities, the Government continues to work with cooperatives, such as NTUC FairPrice and community support programmes, such as the price freezes on essential items under house brands over the period of March 2019 to December 2020.

But as I have mentioned earlier on, I wanted to just reinforce that it is a whole multi-prong approach, a broad and expansive approach that the Government is taking to tackle inflation.

We have mentioned earlier on MAS' monetary policy adjustments, the Government managing supply-site constraints, which is not unique to Singapore but globally. Third, is diversifying food import sources and energy sources over the long term, as we have debated in the House for the last two days. And of course, our particular focus and assistance to lower-income households, including, for example, U-Save vouchers for households living in for 4-room or smaller HDB flats to help them with utility bills.

So, our approach has been multi-pronged. Our approach has been wide and expansive and broad to help our people to cope with inflation.

Sir, the Minister of State mentioned about monetary policy as one of the very important tools to fight imported inflation. So, I would like to ask the Minister of State whether there is further scope for our strong Singapore dollar to mitigate imported inflation, given that it does impact our export competitiveness; whether, from our trade consideration standpoint, is there further room for that to be used to mitigate imported inflation?

Secondly, besides imported inflation, we are also faced with domestic cost pressures. The Minister of State also mentioned about the push for higher wages, the additional measures from the COVID-19-related safe management procedures that the businesses got to follow, the energy prices and others. My concern is whether all these upward pressures on cost will lead to businesses pricing in this anticipated increase in cost and, therefore, will create a spiral in inflation. So, I would like to ask the Minister of State how the Government is going to manage this, whether there will be interventions and also for items that are outside the CPI basket, how are we going to mitigate those cost increases as well.

I thank the Member for his supplementary questions. As we all know, inflation is a clear and present issue confronting and vexing economists this week, as well as central bankers and policy-makers. If you look at it, US consumer price inflation is at 5.4%, the highest in 13 years. South Korea just announced that inflation hit a 10-year high in October.

As I earlier updated, MAS had already made a decisive move on 14 October by raising the slope of the Singapore dollar nominal effective exchange rate. It had also said that it would continue to track the growth and inflation trajectories over the next few quarters.

This is one tool in the toolbox; there are many others. And maybe I will just share with the Member how we are dealing with inflationary issues. If you look at the thing as a whole, this issue has been more acute because of two major challenges. The first is that the supply-side constraints and the second is an economic rebound.

The supply-side constraints have been in place, pre-COVID-19, but accentuated during COVID-19. The economic pick-up will lead to pent-up demand, economic rebounding, and so, you have huge demand but then, continued supply constraints. If you look at what is happening right now, despite all of these input prices, our exports have in fact seen a very strong recovery this year. Our non-oil domestic exports (NODX) increased 9.1% year-on-year in Q3 2021, following the 10.1% expansion in Q2 2021. This NODX growth in Q3 2021 was driven mainly by exports of non-electronic products such as specalised machinery, petrochemicals and pharmaceuticals.

When our export performance is strong, it means also that our exports remain competitive in international markets. And we must keep these markets open so that our goods can flow out. It also manages a hedge against other price increases, inbound. How do we do so? The Member knows that we have undertaken a whole slew and suite of major trade facilitation and multilateral frameworks, such as RCEP, CPTPP. These build upon our existing FTAs with major trade partners, representing 85% of global GDP.

At the same time, the other way to manage this is to ensure that our supply chains remain connected and that means diversifying our import and export markets. We have and are negotiating, and have successfully concluded negotiations on the Pacific Alliance Singapore Free Trade Agreement. It is another arrow in our quiver such that we can open up new markets for our imports to alleviate, again, inflationary pressures. We will also continue to support local enterprises so they can deepen their export capabilities in the global economy and ensure our exports remain relevant and competitive in the international market in the long term.

The other aspects to reduce inflationary pressures include also the supply of industrial and commercial spaces to help moderate business costs and reduce the knock-on impact on consumer prices. These also include measures such as disbursing rental relief to help businesses cope with their rental costs and, hopefully, have knock-on effects to consumers as well.