Inflation has kept low in the past few months, but has picked up and is likely to head higher soon, the Monetary Authority of Singapore (MAS) said on Monday.
It expects consumer prices to rise 2.5 to 3 per cent for this year and another 2 to 3 per cent next year, as the economy continues to grow and businesses pass on more of their rising costs to customers.
In a change from recent years, most of the price hikes are likely to stem from everyday costs rather than dearer homes and cars.
Core inflation, which excludes private road transport and accommodation costs, is tipped to come in at 1.5 to 2 per cent this year, the MAS said. Next year, it is projected to rise to 2 to 3 per cent, which means it will account for almost all of overall inflation.
The central bank on Monday maintained its policy of keeping the Singdollar on a path of "modest and gradual appreciation".
This stand is "appropriate" given "external demand uncertainties and rising domestic inflationary pressures", the MAS said.
The Singdollar held steady at $1.246 against the US dollar after the MAS statement. RBS economist Vaninder Singh tips it to strengthen slightly to $1.24 by the year end. He and other economists believe the Singdollar is set to appreciate around 2 to 2.5 per cent per year against the currencies of its major trading partners.
Calling the MAS' tone "cautiously optimistic and inherently sanguine", OCBC strategist Emmanuel Ng said the central bank seems more focused on combating inflation than boosting growth.
If core inflation rises too much next year, a steeper appreciation of the Singdollar "cannot be ruled out" in April's policy review, said Citi economist Kit Wei Zheng.
The MAS said it expects the Singapore economy to expand for the rest of this year and into next year as the global economy improves, "although some volatility in growth rates is likely".
While it believes imported inflation will stay muted, domestic costs could rise as firms grapple with higher rents, vehicle costs and wages, it said.
Get a copy of The Straits Times or go to straitstimes.com for more stories.