Some analysts and economists said inflationary pressure from higher fuel prices could translate to higher transportation costs leading to increase in food prices for the month.
The inflation figure for October is expected to be released tomorrow. However, RAM Ratings expects the headline inflation rate to moderate to 4.0% in October, from the 4.3% the previous month.
It attributed the slower pace of consumer price increases to weaker contribution from the transport fuel component amid the tapering low-base effects of retail petrol prices.
“The uptrend in global crude oil prices has been unexpectedly steep heading into the final quarter of 2017, with the average price of Brent crude surging to its highest level (since June 2015) of US$57.50 per barrel in October.
“That said, we expect the dissipating low-base effects from retail petrol prices (on the transport component) and the tapering of the inflationary impact from the removal of cooking-oil subsidies in November (on the food component) to offset some of this unanticipated pressure.
“Moving forward, the elevated headline inflation in 2017 is envisaged to moderate to 2.5% next year amid easing direct cost-push factors. RAM expects Brent crude prices in 2018 to average close to this year’s level at US$55 per barrel.
“This trend, along with the absence of further spikes in food prices, will reduce the significance of the incremental lift from the food and transport components in 2018,’’ the rating agency added.
At the same time. RAM Ratings was maintaining its call that there was room for tighter monetary policy, with a hike of 25 basis points (bps) in the overnight policy rate (OPR) next year.
An early survey showed the median expectation for headline inflation, which includes volatile fuel and food prices, hovering at the 4.1% level in October.
Inflation in September rose mainly due to higher transportation costs, which increased significantly by nearly 15.8% year-on-year (y-o-y), the highest among other components of the consumer price index (CPI).
Meanwhile, food and non-alcoholic beverage prices increased by 4.6% y-o-y, second only to transportation costs.
The weak ringgit and the strengthening of domestic demand may also have likely raised inflationary pressure in October, according to analysts.
The ringgit strengthened marginally by 0.4% in the first two weeks of October, but later slipped 0.34% to RM4.23 per US dollar by the end of the month.
AllianceDBS Research chief economist Manokaran Mottain estimates that October’s headline inflation rate could range between 4% and 4.5%.
He cautioned that inflationary pressure this month could be higher, given the continuous increase in RON95 and diesel prices, totalling 18 sen and 12 sen respectively over the first three weeks alone.
The main cause for the expected higher inflation rate in October is the rising fuel prices, he said, adding that the trend was similar to the previous months.
“Higher transportation costs will contribute to higher food prices and this adds to the inflationary pressure. This month, it is likely for the headline inflation to be recorded at a higher level, as petrol and diesel prices have been on the rise,” he said.
Echoing a similar view, Socio Economic Research Centre executive director Lee Heng Guie said the net increase in October’s weekly petrol prices exceeded September’s rise in fuel prices.
Last week, in its last meeting for the year, the MPC gave its strongest signal yet that a rise in lending costs is likely as the domestic economy continues to strengthen.
Many economists and analysts expect a possible rate hike of 25 basis points next year.
UOB Kay Hian Malaysia Research economist Julia Goh does not rule out the possibility of Bank Negara considering two rate hikes, provided growth prospects remained strong and demand-side inflationary pressure picks up.