Volatile CPI expected

Inflation barometer seen swayed by GST, oil price going forward

PETALING JAYA: With the introduction of the goods and services tax (GST) just around the corner, the market expects prices to trend higher.

However, the consumer price index (CPI) would likely reflect the volatility from the pull of higher prices due to the GST and weaker crude oil and other commodity prices.

Given that Malaysia’s fuel prices fluctuate monthly based on the average global crude oil prices for the month, opinions on the impact of the GST versus the lower fuel prices remain debatable.

The CPI for February was flat, gaining only 0.1% year-on-year, but economists expect the CPI to reflect the hike in fuel prices for March.

While prices would certainly trend upwards with the GST, continued weakness in crude oil prices and the mitigating effect from lower fuel prices could also see prices moving the other way, albeit on a smaller scale.

According to Alliance Research chief economist Manokaran Mottain, the CPI would remain volatile in the first half of the year before stabilising somewhat in the second-half, as crude oil prices trend higher.

“The first half will see the index moving up and down and this will be reflective of the weak oil price,” he told StarBiz.

CIMB Investment Bank Bhd economist Julia Goh said in a report that inflation should revert to an upward trajectory in the second quarter, although the degree of the rise would depend on the oil price movement in the second-half of the year.

She expects the CPI to revert to an upward trajectory from April, following the introduction of the GST and assuming no further big declines in oil prices.

The CPI has trended lower in the first two months of the year compared to the same period last year.

While a lot of it was due to the high-base effect, lower fuel prices have played an important part.

Bank Islam chief economist Mohd Afzanizam Abdul Rashid said the “lower oil price environment is likely to keep inflation well in check”.

He noted that RON95 and RON97 accounted for 7.6% and 0.6% of total CPI weighting.

Afzanizam expects the GST’s impact on prices reflected in the CPI to be manageable.

“Based on Bank Negara internal estimates, only 50% of the CPI basket is subject to the 6% GST, while 30% is zero-rated and the remaining 20% is exempted from the GST,” he added.