[SINGAPORE] Escalating tensions in the Middle East could spark a new wave of inflationary pressures, warned private sector economists, even as Singapore’s authorities kept to their full-year inflation forecast.
The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) on Monday (Jun 23) left their 2025 core inflation forecast of 0.5 to 1.5 per cent unchanged, after May’s inflation readings dipped from the previous month.
According to data from Department of Statistics, Singapore’s core and headline inflation edged down to 0.6 per cent and 0.8 per cent respectively, in line with economists’ expectations. On a month-on-month basis, core inflation was flat while headline inflation rose 0.7 per cent.
Still, private-sector economists warned that the escalating conflict between Israel and Iran could bring a spike in oil and energy prices, and consequently put upward pressure on Singapore’s inflation.
This prompted UOB to raise its full-year core inflation forecast to 0.8 per cent, from 0.7 per cent, in 2025, and 1.6 per cent, from 1.3 per cent, in 2026, under its base case of a “weaker pass through from higher oil prices” and a gradual de-escalation in geopolitical tensions.
In the bank’s worst case, core inflation could surge to 2.6 per cent in the first quarter of 2026, while moderating to 2.1 per cent in the second half of next year. Overall, core inflation could average 1.2 per cent and 2.3 per cent, respectively, in 2025 and 2026.
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Its associate economist, Jester Koh, estimates that about 7.7 per cent of the overall consumer price index (CPI) basket could be directly impacted by higher oil prices, including components such as electricity, gas, petrol, point-to-point transport services, airfares, transport services of goods, as well as bus and train fares.
“Additionally, the spillover effects of higher utility, transportation and input costs on both goods and services inflation could be significant,” he added.
According to UOB’s estimates, year-on-year core inflation could rise by five to six basis points for every US$1 per oil barrel increase in Brent crude oil prices. Further, any supply-led spike in oil prices could filter through to Singapore’s inflation “largely within three to four months”, said Koh in a research note.
Meanwhile, RHB maintained its core inflation forecast of 1.1 per cent – but at the higher end of the official forecast range, the forecast factors a potential spike in oil prices driving higher global inflation.
“The recent US involvement in the Iran-Israel conflict, including strikes on Iranian territory, has driven oil prices higher over the weekend, extending a three-week rally,” said economists Barnabas Gan and Laalitha Raveenthar.
“Imported goods and services may become more expensive if global supply chains are disrupted or rerouted due to regional conflict.”
Monetary policy settings
MAS and MTI, however, said that the impact of the trade conflicts and higher global energy prices on Singapore is likely to be offset by the disinflationary drags exerted by weaker global demand.
“While crude oil prices have risen in recent weeks, they are for now still close to the average in 2024,” they said. Singapore’s imported inflation thus should remain moderate.
Agreeing, Maybank economists Chua Hak Bin and Brian Lee said imported prices should remain contained due to weak global demand and contained food commodity prices, amid abundant supply conditions.
An appreciating Singapore nominal effective exchange rate (S$NEER) will also put a lid on imported costs, the economists added.
Against this uncertain outlook, economists largely expect MAS to maintain its current policy stance in the upcoming July monetary policy meeting.
Said Maybank’s Dr Chua and Lee: “Inflation remains contained, while growth is slowing to a more sustainable pace.”
RHB’s Gan and Raveenthar, however, believe rising volatility could prompt MAS to widen the S$NEER policy band, while maintaining the current appreciation slope.
They also do not rule out the possibility of MAS flattening the slope of the policy band in future reviews, should trade tensions escalate again or if global demand slows more sharply than anticipated.
“While the headline and core inflation remain contained, the balance of risk has tilted towards the need to support growth, given rising external uncertainties,” said Gan and Raveenthar.
The outlier was UOB’s Koh, who expects MAS to flatten the S$NEER slope in the upcoming review. “We assess that the economic outlook still warrants a further easing move,” said Koh, adding, however, that MAS may choose to delay monetary policy easing to the subsequent October policy meeting instead.
“Greater clarity could emerge with regard to tariff policy, the Middle East conflict and economic data (between July and the subsequent policy meeting in October), conferring the advantage for MAS to adjust monetary policy possibly with more comprehensive information.”
Key CPI categories
In May, most consumer price index (CPI) categories saw easing prices, except for accommodation and services inflation, which was unchanged from the month before.
Food inflation eased to 1.1 per cent, from 1.4 per cent previously, as the prices of non-cooked food rose at a slower pace.
Meanwhile, electricity and gas inflation fell further to 3.7 per cent, from a fall of 3.5 per cent, due to a larger decline in electricity prices.
Retail and other goods prices continued to fall, but at a slower pace of 1 per cent, compared to a decline of 1.2 per cent previously, due to increases in the prices of household appliances, which offset a smaller decline in the cost of personal effects.
Private transport inflation rose at a slower pace of 1.1 per cent, from 1.3 per cent previously, on the back of a smaller increase in car prices.
Meanwhile, both services and accommodation inflation were unchanged from the previous month, at 1.1 per cent, respectively.
