Singapore’s inflation rate stayed at a 26-year high for a third consecutive month in June, pushing its monetary authorities - who are simultaneously grappling with a rapidly cooling economy - into a tight corner over an appropriate policy response.

For now, the best approach may be for the Monetary Authority of Singapore to stick with its current bias of a modest currency appreciation, analysts said, given what they see as a near-term peak in inflation.

“Even if the central bank revises up the inflation forecast, they may also revise down the economic growth forecast,” said Selena Ling, a strategist at Oversea-Chinese Banking Corp. “That combination will probably lead them to stay with current policy.”

Data issued earlier Wednesday showed that the consumer price index - a non-core measure of costs for goods and services - rose 7.5% from a year earlier.

Economists polled by Dow Jones Newswires forecast consumer prices to have risen 7.9%.

Nations throughout Asia have been battling a surge in food and energy costs, and Singapore recently responded with stronger-than-expected policy tightening to reign in consumer prices.

“The central bank has got its eye back on the inflation ball, but prices aren’t going to collapse,” said Joseph Tan, senior strategist at Fortis Bank in Singapore. “While the base effect from the tax hike will probably bring inflation down, it doesn’t make sense to meddle with policy yet.”

Singapore implemented a sales-tax increase in July last year that gave a boost to inflation figures over the past year, but the impact will disappear next month.

Still, Tan said that oil prices could easily push inflation beyond the central bank’s current full-year target of 5%-6%.

Earlier this week, an official from the MAS said that inflation is likely to be lower in the second half of the year but the degree of any decline remains unclear.

The authority tightened policy for a second straight meeting in April, and in May raised its full-year inflation forecast to the current level.

Economic Outlook Cloudy

Singapore is also coping with a bleak economic growth outlook as exports of key electronics and pharmaceuticals products have slumped in recent months.

The government now predicts the economy will expand 4%-6% this year, slower than last year’s 7.7% pace.

The authority targets the exchange rate rather than interest rates to control prices, which leaves it with few options for fighting non-imported inflation.

“The bottom line is that there is only so much the exchange rate can achieve,” said Robert Prior-Wandesforde, an economist at HSBC in Singapore.

To address costs of property and labor, he said the government may need to cut fiscal stimulus or relax immigration laws to relieve strain in the labor market.

Accommodation expenses were a leading driver of inflation in June, with the housing component of the index gaining 13.4% from a year earlier.

Some of the rise in the housing component is due to a new computation technique implemented in January, which uses market prices rather than delayed data.

Food costs rose 9.2% from a year earlier as a result of higher prices for rice, milk, and vegetables.

Transport costs also increased further in June on account of higher taxi fares and more expensive gasoline.

On month, the index gained 0.4% in seasonally adjusted terms, exceeding the poll forecast for a 0.7% rise. The index had risen 0.3% in May from April.

In unadjusted terms, the index fell 0.3% in June from May.