When Costs Start to Bite

The focus over the past week has shifted. What initially appeared as an energy-driven disruption is now showing clearer signs of transmission into prices, sentiment and activity.

The latest US Consumer Price Index (CPI) confirms that this process is already underway. Headline CPI rose to 3.3% year-on-year in March, the highest level since mid-2024, driven largely by a sharp increase in energy costs. On a monthly basis, prices rose 0.9%, with gasoline accounting for a significant portion of the move. While core inflation remained more contained, the divergence reflects the early stage of a cost shock that has yet to fully filter through the broader economy.

Household sentiment is already responding. Consumer confidence has weakened sharply, with the University of Michigan index falling to a record low, alongside a notable increase in short-term inflation expectations. This combination of rising prices and weakening confidence suggests that the effects are not confined to inflation data alone, but are beginning to influence behaviour.

Early Signs of Transmission

The softening in activity is becoming more visible across global indicators. The S&P Global Composite Purchasing Managers’ Index (PMI) fell to 51.0 in March, its lowest level in nearly a year, reflecting slower output growth across both manufacturing and services. While still in expansionary territory, the loss of momentum is broad-based, with new business growth slowing and business optimism weakening.

At the same time, cost pressures are intensifying. Input prices rose at the fastest pace in over three years, driven by higher energy and commodity costs alongside renewed supply chain delays. The combination is important. Activity is not collapsing, but it is becoming more uneven, particularly in sectors where margins are more exposed and the ability to pass through costs is more limited.

These developments tend to emerge gradually. The initial impact is visible in energy, but the more persistent effects appear later, as higher costs work their way through production, pricing and demand across the economy.

Asia Holds, But Pressure Builds

Across Asia, the picture remains one of relative resilience, though underlying pressures are becoming more apparent. In Singapore, activity levels remain strong, with the PMI easing only slightly to 56.7 in March, well above historical norms. Output and new orders continue to expand, supported by manufacturing, while hiring remains robust.

This strength, however, is increasingly accompanied by rising cost pressures. Input prices have reached survey highs, driven by increases in fuel, food, utilities and transport, while firms are passing these costs through to customers at a record pace. The result is an environment where activity remains firm, but the conditions supporting that growth are becoming more strained.

At the regional level, the outlook is also becoming less certain. The Asian Development Bank has warned that growth across developing Asia is likely to moderate while inflation rises, particularly if energy prices remain elevated for a prolonged period. 

Singapore’s Response Moves Into Execution

The policy response in Singapore is beginning to move from signalling to implementation following the recent parliamentary discussions.

Last week’s announcement of a ministerial task force reflected a recognition of the potential scale of the shock. While detailed measures from that process have yet to be fully outlined, initial steps have already been taken to address rising cost pressures.

The government has brought forward the disbursement of S$500 in CDC vouchers to June, ahead of the original schedule, and increased payouts under the Cost-of-Living Special Payment. These measures are aimed at cushioning the immediate impact on households, particularly as food and essential costs begin to rise.

At the same time, authorities have indicated that they are closely monitoring price movements in key categories, including food and daily necessities, where the effects of higher energy and logistics costs are most directly felt. 

This progression is important. The policy stance has shifted from preparing for disruption to managing its early effects, even as the broader response framework continues to take shape. Fiscal support can help ease near-term pressures, but it does not address the underlying source of the shock, which remains external and supply-driven.

Markets are Adjusting, But Not Fully

Financial markets have begun to reflect the shift in conditions, though the adjustment remains measured. Bond yields have moved higher, consistent with a reassessment of inflation risks and a more uncertain policy outlook. Expectations for rate cuts have become less certain, with policymakers signalling a more cautious approach in the face of rising costs and mixed growth signals. 

Despite this, broader market behaviour suggests that the implications are not yet fully reflected in pricing. Risk assets remain relatively supported, and volatility, while higher, does not indicate a significant dislocation. The pattern points to a gradual repricing rather than a sharp correction, leaving open the possibility of further adjustment if current conditions persist.

What to Watch

Several developments in the coming weeks will be important in determining how this environment evolves.

Inflation data will be closely watched for signs that cost pressures are beginning to move beyond energy into broader categories. Activity indicators, particularly in services and consumer-facing sectors, will provide early signals on how demand is responding to higher prices. At the same time, policy responses, both in Singapore and globally, will be assessed for their effectiveness in cushioning near-term impacts without adding to longer-term imbalances.

These factors will shape whether current conditions stabilise or become more pronounced over time.

Conclusion

The key shift is not the initial shock, but the way its effects are beginning to spread.

Inflation has moved from expectation to data, while activity and sentiment are starting to reflect the impact. Policy responses are being deployed, but are necessarily focused on mitigation rather than resolution.

The direction is becoming clearer. What remains uncertain is how far and how quickly these pressures extend across the broader economy.