2023 Outlook for Inflation, Cost of Living and Singapore Dollar

Speaker, Singapore’s inflation outlook this year is dependent on both external and domestic factors. Externally, global inflation is likely to stay firm in the near term as global energy and food commodity prices remain elevated despite coming off their peaks in 2022. At the same time, labour markets in advanced economies remain tight, thereby keeping pressure on wages.

Domestically, businesses are likely to continue to pass through elevated import and utilities costs, along with rising labour costs, to consumer prices. Meanwhile, housing rent and car inflation are projected to remain firm due to the strong demand for rental housing and tight COE quotas respectively.

Taking these factors into account, inflation in Singapore is expected to remain elevated in the first half of 2023, before slowing more discernibly in the second half, as global inflation moderates and the current tight domestic labour market eases. For 2023 as a whole, the CPI-All Items inflation is projected to come in at 5.5% to 6.5%, compared to 6.1% in 2022. Over the same period, MAS Core Inflation – which excludes accommodation and private transport costs – is expected to average between 3.5% and 4.5%, compared to 4.1% in 2022.

On our monetary policy, as I had explained to this House in November last year, the effects of the Monetary Authority of Singapore (MAS)’s five successive monetary policy tightening moves will continue to dampen inflation in the year ahead. MAS remains watchful of the near-term risks to inflation and growth. The agency will review our monetary policy in April 2023.

Thank you, Sir. I appreciate the proactive move by the MAS with the stronger Singapore dollar to help mitigate the imported inflation. We have also read about how the supply chain has stabilised, which hopefully, will not add new pressures to our inflation from external sources. I wish to ask the Minister of State how much inflationary pressure does he see coming from domestic sectors. In other words, how much of the inflationary pressure is domestically driven? Secondly, what more can we do to manage this domestic cost pressure, which the businesses are facing?

I thank the Member for his supplementary question. In fact, MAS was very pre-emptive in its response to the pick-up in inflation, having started monetary policy tightening in October 2021, even when global inflationary pressures were relatively modest. That is important. And just to give Members a sense, as at end January 2023, the Singapore dollar nominal effective exchange rate (S$NEER) has strengthened by 7.8% against a basket of currencies of our major trading partners, if you compare that to October 2021, when MAS first began tightening monetary policy.

On domestic inflation, domestic inflation is related to external factors. So, if you look at the external front, you might have fresh shocks to global commodity prices such as those arising from worsening geopolitical tensions or a significant strengthening of demand following the reopening of China's economy. This, naturally, will result in higher domestic inflation, particularly for food and energy-related items.

Domestically, more persistent than projected manpower shortages could culminate in stronger labour cost pressures.

The Government is aware of this but we expect this current tightness in the domestic labour market to ease over the course of the year, particularly with labour demand likely to soften amidst global economic headwinds, while continued non-resident inflows could also help to reduce labour market tightness and moderate cost pressures.

For labour costs, the Government is also co-funding the wage increases of lower-wage workers for five years, from 2022 to 2026, under the Progressive Wage Credit scheme (PWCS). As part of this $1.5 billion support package announced in June, the Government's co-funding share of this 2022 PWCS support was enhanced from 50% to 75% for wages up to $2,500, and from 30% to 45% for wages above $2,500 and up to $3,000.

The Government will look into the business environment and assess if more support schemes are required to support our businesses.

Thank you, Mr Speaker. I thank the Minister of State for the answers he gave earlier. I just want to ask a broad, macro question. Can I have a sense of the Government's view of the growth and inflation bias for 2023 and into 2024 as well, especially with China reopening. The Minister of State has given a very extensive answer on inflation. But may I have a rough sense, what is the growth and inflation bias in terms of the outlook for 2023 and going into 2024?

As I mentioned in my earlier reply, CPI-All Items inflation is projected to be higher, as well as our core inflation, but the global market outlook is uncertain; in part, because of potential geopolitical tensions that we have been seeing in the news almost every day. There is also a softening of or normalisation of supply chains but it continues to be tight. We are still quite moderate in our expectations for growth, but at the same time, it is important for us to keep a longer-term view. That is why, for example, for the monetary policy to be proactive, for fiscal policy to be also supporting both our businesses as well as Singaporeans as a whole.