Drivers for Inflation Over Next 24 Months and Impact on Singapore's Economy

Mr Desmond Choo asked the Minister for Trade and Industry (a) what is the expected inflation over the next 24 months; (b) what are the key drivers of the inflation; and (c) what is the impact on Singapore's economic recovery and performance over the next 24 months.

CPI-All Items inflation picked up to 2.5% on a year-on-year basis in the third quarter of 2021, from 2.3% in the second quarter. 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 Organization of the Petroleum Exporting Countries Plus (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. About 95% of our electricity is currently generated using natural gas.

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 shortages and export restrictions in key food-producing countries, amidst rising global demand. Higher global food prices will in turn 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.

Despite the 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.