Singapore core inflation holds steady, but Middle East risks loom

In May, Singapore’s core inflation eased to 0.6%—a modest step down from April’s 0.7%. Headline inflation followed suit, dipping to 0.8%. For a trade-dependent economy that endured years of pandemic-era price volatility, this latest data appears reassuring. But the surface calm belies a deeper shift in tone. The Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) have now reclassified inflation risk as “rising,” citing increased uncertainty in the external environment.

This isn’t just statistical conservatism. It’s a deliberate strategic posture shift—from watching domestic price trends to preparing for geopolitical-driven cost shocks. The most pressing risk? The Strait of Hormuz, through which one-fifth of the world’s oil flows, and which Iran has threatened to disrupt amid escalating regional tensions. For Singapore, a price taker in global energy markets, this signals a shift from disinflationary comfort to imported volatility vigilance.

Singapore’s recent inflation performance offers temporary relief. After six consecutive months of year-on-year declines, core inflation had ticked up in April, prompting concerns that disinflation might be bottoming out. May’s data allays those fears—for now. Food inflation slowed, electricity prices fell further, and private transport inflation cooled. Government subsidies on healthcare and education are helping to cushion household costs.

But these domestic stabilizers only hold so long as external shocks stay manageable. Singapore imports over 95% of its energy and much of its food. The price tags at hawker stalls or MRT fare hikes might look local—but their upstream costs are not. If oil prices spike due to Middle East instability, those pressures will reverberate through transport, logistics, and electricity tariffs.

The Strait of Hormuz is not just a shipping lane—it’s a geopolitical risk barometer. Any credible threat to its closure, even short of actual disruption, triggers pricing fear. As Saxo’s chief strategist pointed out, Tehran doesn’t need to act—just the possibility that it could is enough to push global crude prices upward.

Singapore’s central bank knows this. DBS and UOB have already quantified the potential transmission effect: every US$1 increase in Brent crude could lift core inflation by 0.05 to 0.06 percentage points. A sustained US$10–15 increase would be material, potentially pushing Singapore’s inflation toward the upper end of MAS’s forecast band of 0.5% to 1.5%—or beyond.

This is why the MAS has stopped calling inflation risks “tilted to the downside,” as it did in earlier months. Even with May’s benign print, the outlook is no longer a story of gradual normalization. It’s one of volatility hedging.

The good news: the global system still has spare capacity. OPEC+ countries, including Saudi Arabia and Russia, have not fully restored production cuts made since 2022. If crude spikes, they could ease output restrictions. China and OECD economies have also accumulated substantial oil stockpiles, offering short-term supply buffers.

Singapore’s imported inflation, in other words, doesn’t face an unmanageable shock scenario—unless multiple stress points converge. A full-blown Middle East conflict, sustained shipping disruption, or coordinated supply cuts could strain even these buffers.

This is where Singapore’s open-economy vulnerability becomes evident. It doesn’t control commodity pricing. It controls capital flow signaling, fiscal cushioning, and policy consistency. That’s the lane MAS is staying in.

MAS’s decision to leave its inflation forecast unchanged, despite signaling elevated risk, is telling. It reflects a strategy of anchored expectations—neither over-reacting to volatility nor underestimating second-round effects. The Singapore dollar remains on a managed appreciation path, and the slope of the exchange rate band has not been altered since April.

In effect, MAS is using calibrated restraint as a credibility anchor. The institution knows that raising the inflation forecast prematurely would risk spooking markets, while lowering it would suggest complacency. Instead, it’s emphasizing vigilance—signaling that imported inflation remains a watchpoint, not yet a determinant. This strategy is familiar. In past episodes—be it during the US taper tantrum or COVID-era supply shocks—Singapore’s central bank has relied on the strength of its communication channel as much as its monetary toolkit. Today’s environment is no different.

For corporates and sovereign allocators, the message is nuanced. Inflation is low—but its trajectory is conditional. Nominal wage pressures are cooling, but oil and freight costs may re-accelerate. Fiscal subsidies help mute volatility, but they’re not endless.

What this points to is not just a policy snapshot—but a policy stance under stress testing. If tensions in the Middle East worsen, Singapore will not be shielded by data alone. It will rely on its structural discipline: clear central bank signaling, prudent reserves, and macro policy alignment. Singapore’s inflation may be low—but the regime behind it is quietly tightening its external threat calculus. And that’s the signal worth watching.