Projecting Inflation Tail Risks in a Small Open Economy: Some Evidence from Singapore

This study empirically assesses the drivers of risks to the inflation outlook for a small open economy like Singapore. We apply the inflation-at-risk framework of López-Salido and Loria (2020) and incorporate projections from the Survey of Professional Forecasters (SPF) as point forecasts of inflation. Our findings show that macro-financial risk factors—shaped by Singapore’s openness, role as a financial hub, and exchange rate–centered monetary policy framework—enter nonlinearly into inflation risk models and exert differentiated effects. Foreign price pressures heighten upside risks, and exchange rate policy has proven effective at mitigating them. Tighter global financial conditions amplify inflation risks through cost-push channels, whereas demand weakness produces only muted downside effects. We also record sharp gains in log predictive scores for one-quarter ahead conditional distributions relative to unconditional ones during the post-pandemic inflation surge. One-year-ahead predictive distributions become markedly right‑skewed ahead of the surge, effectively signalling a heightened probability of extreme inflation outcomes. Overall, incorporating inflation risk measures improves both the in-sample fit and the forecast accuracy of predictive distributions of inflation one and four quarters ahead, offering insights for central banks navigating uncertain global conditions.