Inflationary pressure to cool but prices likely to stay high


PETALING JAYA: Although inflationary pressure may ease somewhat, prices could remain elevated this year. This may put a strain on the cost of living.

Economists are projecting an inflation rate of between 2.2% and 2.8% for this year after a contraction of 1.1% in 2020. They expect inflation to moderate by next year.

Inflation rate in July this year decelerated to 2.2% year-on-year (y-o-y) against 3.4% y-o-y in June.

This was due to continued dissipating base effect and electricity discounts as announced in June under the National People’s Well-Being and Economic Recovery Package or Pemulih economic package.

Growth eases: Inflation rate in July this year decelerated to 2.2% year-on-year against 3.4% year-on-year in June.Growth eases: Inflation rate in July this year decelerated to 2.2% year-on-year against 3.4% year-on-year in June.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told StarBiz he believed the supply bottleneck would be the key catalyst for prices to stay elevated.

For example, he said the shortages of microchips due to the lockdown has affected the production of automotive and electronic and electrical products.

Similarly, he added that the prices of food and beverages, in particular the food production, face the same situation as the movement control order (MCO) has affected the timeliness of crop harvesting due to limited supply of labour.

“In general, prices tend to be sticky downwards and are inflexible, while the cost of living is expected to stay elevated.

“At the same time, the demand is still soft as the labour market is still weak as reflected by the high unemployment numbers. Given that, the upward pressure on prices would be limited,” he noted.

Bank Islam Mohd AfzanizamBank Islam Mohd Afzanizam

Apart from that, he said some food items are being controlled and there is also fuel subsidy, adding that this could help mitigate the price pressure.

“In a nutshell, the inflationary pressures may not be uniform but prices would remain elevated,” he said.

Afzanizam, who is forecasting an inflation rate at 2.5% this year, said the low base effect last year was the primary factor for higher inflation rate, given the 1.1% contraction in 2020.

Beyond the low base, he said the supply bottleneck is also contributing to the current rise in inflation rate. Inflation would be driven mostly from the cost factor.

Demand is still soft, given the weak labour market and gradual reopening of the economy, he said.

Also there is a need to differentiate between inflation and the cost of living, Afzanizam said. The former is about the pace of the increase in prices and the latter is the actual cost that a consumer pays to procure a product or services.

“Slower inflation does not mean prices are declining. In fact, prices are still rising albeit at a slower pace. But the price level will stay elevated, given the positive growth in consumer price index (CPI). Prices are generally not flexible. It is quite rigid and it tends to go up.

“There are also factors related to malpractices in businesses such as hoarding and price manipulation that could also result in higher prices. Corruption could also be a contributing factor for higher prices as it will increase the cost of doing business.

“The government should ensure that the market is fair and free from corrupt practices whereby the price discovery mechanism can be established in the most efficient manner,” Afzanizam noted.

AmBank Group chief economist Anthony Dass (pic, below) said that after facing monthly deflation for nearly a year, Malaysia is expected to feel inflationary price pressure once again.

Gradual reopening of the economy from MCO 3.0 and monetary and fiscal policies continue to be accommodative to support the global recovery, he said, adding that pent-up demand may be about to be unleashed.

e said upwards cost pressures are on the rise owing to the MCO 3.0 that could result in potential transfer pricing to consumers.

Still, on the whole, Dass said there is less reason for concern.

“It is because of the temporary nature of price pressures, well-anchored inflation expectations, and structural factors that are still depressing inflation.

“Also, the upside to inflationary pressure would fizzle from the low base effect and some containment of cost pressures from household electricity bill discount for the second half of the year as well as the extension of the ceiling price for RON95 and diesel pump price.”

Dass, who is expecting an inflation rate of between 2.6% and 2.8% this year, said he anticipated inflation to moderate next year and beyond.

And beyond 2021, inflation is expected to moderate as growth settles at a lower level, commodity prices stabilise and supply bottlenecks are eased.

However, Dass cautioned the effects in the event of growing inflationary pressures.

He said financial market participants may become concerned about persistently higher inflation and may reassess prospects for continued accommodative monetary policies by major central banks including Bank Negara.

“This could trigger a significant rise in risk premium and borrowing costs. Emerging markets including Malaysia are particularly vulnerable to such financial market disruptions because of the record high debt and a lagging economic recovery from the pandemic.

“In the event of financial market stress, sharp exchange rate depreciations and capital outflows may force to abruptly tighten policies in a manner that could dampen recoveries.

“Anchoring inflation expectations will be critical in preserving central banks’ including Bank Negara room to manoeuvre even during periods of financial stress,” Dass said.

AmBank's Anthony DassAmBank's Anthony Dass

Meanwhile, CGS-CIMB Research expects the monetary policy stance to stay accommodative.

Moderating headline inflation and muted core inflation, which underpinned weakness in domestic demand, imply the monetary policy would likely remain accommodative, it said.

“We expect the overnight policy rate (OPR) to stay at 1.75% in 2021 to support the economy. As Malaysia’s economic outlook improves in 2022, we expect the OPR to follow the gentle upward drift in short-term interest rates and inflation expectations globally.

“We foresee a total of 75 basis points in rate increases by end-2022, with the first hike coming as early as May next year,” the research house said.

Maybank IB Research expects inflation to continue the moderating trend, and has revised downward its full-year 2021 CPI forecast to 2.2% from 2.6%.

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