Singapore Core Inflation Drops to 0.8%

Singapore's Core Inflation Decline to 0.8% in January 2025

Singapore's core inflation rate plummeted to 0.8% in January 2025, marking its lowest level since June 2021 and signaling a significant easing of underlying price pressures. This sharp decline from 3.1% in January 2024, coupled with robust economic growth, presents a fascinating case study in economic stability and policy effectiveness. This report delves into the factors driving this drop, the sectoral contributions, global and domestic influences, financial implications for assets, and actionable steps for stakeholders, providing a detailed analysis for investors, policymakers, and households.

Understanding Core Inflation and Its Significance

Core inflation excludes accommodation and private road transport costs from the Consumer Price Index (CPI), aiming to reflect day-to-day price changes affecting most households more accurately. In January 2025, core inflation slid to 0.8% year-on-year, down from 1.7% in December 2024, and significantly lower than the 3.1% recorded a year earlier. This drop is notable, marking the lowest level since June 2021, when core inflation stood at 0.6%.

The significance of this decline lies in its implications for economic stability and household purchasing power. Low core inflation suggests that the cost of living, excluding certain volatile sectors, is rising at a slower pace, potentially easing financial pressures on consumers. However, it also raises questions about demand and the risk of deflation if inflation falls too low. Given Singapore's economic context, with GDP growth of 4.4% in 2024 and a forecast of 1.0% to 3.0% for 2025, this drop indicates a decoupling of growth and inflation, a scenario that warrants closer examination.

Sectoral Breakdown: Drivers of the Inflation Decline

To dissect the factors contributing to the 0.8% core inflation rate, we analyze the sectoral data for January 2025:

- Electricity and Gas: Prices fell by 2.9% year-on-year, a stark contrast to a 2.4% increase in December 2024. This significant decline suggests a stabilization or reduction in energy costs, possibly driven by lower global oil prices or improved supply conditions. Given Singapore's reliance on imported energy, this reflects favorable external market dynamics.
- Retail and Other Goods: Inflation in this category turned negative, dropping by 0.6% year-on-year after a 0.5% increase in December 2024. Sharper declines in footwear prices and falls in medical goods and other personal effects indicate potential oversupply or aggressive pricing strategies by retailers. This deflationary trend in retail could signal weaker consumer demand or increased competition.
- Food Inflation: Moderated to 1.5% from 2.3% in December 2024, primarily due to slower increases in prepared meal prices. This suggests that the cost of dining out or purchasing ready-to-eat food has stabilized, possibly due to lower ingredient costs or competitive pricing in the food service sector. Given food’s significant weight in household budgets, this moderation is a key contributor to the overall decline.
- Services Inflation: Dipped to 1% from 1.6%, driven by falls in education and healthcare service costs. This could be a result of increased competition, government subsidies, or efficiencies in service delivery. Services, excluding accommodation, are a critical component of core inflation, and this dip underscores the effectiveness of domestic policies in controlling service-related costs.
- Accommodation and Private Transport: Accommodation inflation eased to 1.6% from 2.1%, with smaller increases in housing rents and maintenance costs, while private transport inflation rose to 2.8% from -0.9% due to higher car prices. However, these categories are excluded from core inflation, so their changes do not directly affect the 0.8% rate but are relevant for overall inflation, which eased to 1.2% in January 2025.

This sectoral breakdown reveals that the decline in core inflation is broad-based, with most included categories contributing to lower price pressures. The exclusion of accommodation and private transport from core inflation highlights a focus on day-to-day household expenses, making this drop particularly significant for consumer sentiment.

Global and Domestic Influences on Inflation

The decline in core inflation can be attributed to a mix of global and domestic factors, each playing a pivotal role in shaping price dynamics:

- Global Factors: Singapore’s imported inflation is expected to remain moderate, reflecting favorable supply projections in key food commodity markets and forecasts of declines in global oil prices. This is crucial for Singapore, a small, open economy heavily reliant on imports. Lower global commodity prices, particularly in energy and food, directly reduce input costs for domestic producers and retailers, contributing to the observed deflation in electricity, gas, and retail goods. While trade frictions could be inflationary for some economies, their impact on Singapore’s import prices is likely offset by weaker global demand, further supporting lower inflation.
- Domestic Factors: Unit labor costs are projected to rise gradually, with nominal wage growth easing and productivity increasing. This suggests that labor cost pressures are not significantly driving inflation upward, allowing for price stability. Enhanced government subsidies for essential services such as public healthcare, preschool education, and public transport are dampening services inflation, particularly evident in the dip in education and healthcare costs. These subsidies, combined with policy measures to control housing rents and maintenance costs, contribute to the overall easing of inflationary pressures.

This interplay of global and domestic factors underscores Singapore’s ability to leverage external market conditions and internal policy tools to manage inflation effectively. The combination of lower import costs and targeted domestic interventions has created a conducive environment for price stability, even as the economy grows.

Economic Growth and Inflation: Sustainability and Risks

Despite the drop in core inflation, Singapore’s economy demonstrated robust growth, with GDP expanding by 4.4% in 2024, surpassing earlier estimates of 4.0%. This growth, driven by sectors like wholesale trade, finance, and manufacturing, marks the fastest pace since 2021. The forecast for 2025, set at 1.0% to 3.0%, indicates a slowdown but still suggests continued expansion, particularly in electronics and trade-related services, supported by robust demand for semiconductor chips.

This combination of low inflation and strong growth is generally positive, as it suggests the economy is expanding without significant inflationary pressures, providing a stable environment for investment and consumption. However, the low core inflation rate of 0.8% raises questions about sustainability. While not yet deflationary, it is below the target of just under 2%, which is seen as consistent with overall price stability. Prolonged low inflation could signal weak demand, potentially leading to deflationary risks if consumer spending falters or if global demand weakens further.

Financial Implications for Assets in Singapore

The decline in core inflation to 0.8% has profound implications for financial assets in Singapore, influencing returns, valuations, and investment strategies across various asset classes.

- Equities: Low inflation typically reduces pressure on corporate profit margins, as input costs like energy and raw materials decrease. For Singapore’s export-oriented firms, particularly in manufacturing and trade, this enhances competitiveness, potentially boosting earnings and stock prices. However, the risk of weak demand signaled by low inflation could dampen consumer-facing sectors like retail and hospitality, leading to uneven performance in the Straits Times Index (STI). Investors should expect stronger returns from growth-oriented sectors like technology and finance, which accounted for much of the 2024 GDP growth, rather than defensive stocks tied to domestic consumption.
- Bonds and Fixed Income: With inflation at 0.8%, real yields on Singapore Government Securities (SGS) become more attractive. For instance, if 10-year SGS yields hover around 2.5%, the real yield exceeds 1.5%, offering a compelling return in a low-inflation environment. This could draw institutional investors seeking safe-haven assets, pushing bond prices up and yields down slightly over time. However, if the Monetary Authority of Singapore (MAS) opts for a more accommodative policy to lift inflation, short-term yields might face downward pressure, favoring longer-duration bonds.
- Real Estate: The easing of accommodation inflation to 1.6% suggests a cooling in rental growth, which could stabilize residential property prices. While this benefits tenants, it may cap upside potential for real estate investment trusts (REITs) reliant on rental income escalation. Commercial property, particularly in sectors tied to robust GDP growth like logistics and industrial spaces, might outperform residential assets. Investors should anticipate modest capital appreciation rather than significant gains unless private transport cost increases spill over into broader housing demand.
- Cash and Savings: With core inflation below 1%, cash holdings and fixed deposits offering rates above 2% (common in Singapore’s competitive banking sector) provide positive real returns. This makes cash a viable short-term option, especially if deflationary risks emerge, reducing the opportunity cost of holding liquidity. However, over the long term, this environment favors reallocating capital into growth assets to outpace inflation forecasts of 1.0% to 2.0% for 2025.

The financial landscape suggests a mixed bag: opportunities in equities and bonds tied to growth and stability, tempered by caution in real estate and consumer-driven sectors. Low inflation enhances purchasing power but could erode confidence if it persists too long, impacting asset valuations.

Policy Implications for Monetary Policy and Future Outlook

Forecasts for 2025 project core inflation to average 1.0% to 2.0% and overall inflation at 1.5% to 2.5%, anticipating a pickup in private transport inflation. This stability in forecasts suggests that current monetary policy settings, managed through the exchange rate, are deemed appropriate. Singapore’s unique monetary policy framework allows for flexibility in responding to inflationary trends.

With core inflation at 0.8%, below the target range, a more accommodative stance might be considered, potentially adjusting the exchange rate to prevent inflation from falling too low. This could involve a gradual appreciation path to support import price stability or other measures to stimulate demand if needed. Fiscal measures, such as subsidies for essential services, are also playing a role and could complement monetary policy efforts.

Looking ahead, several factors will shape Singapore’s inflation trajectory. Continued stability in global commodity prices, particularly oil and food, will help maintain low inflation, as will ongoing subsidies for essential services. The labor market, with moderate wage growth and improving productivity, is unlikely to exert upward pressure on prices. However, the increase in private transport inflation due to higher car prices, though excluded from core, could influence overall inflation and consumer sentiment, warranting close monitoring.