Inflationary consequences


SARAVANAN, a minimum wage worker, complains about how he has to pay almost RM10 more for five kg of cooking oil in a span of just two years.

“The price of vegetables, poultry products and processed items have all increased significantly. The only thing that doesn’t increase as much is my salary.

“I’m not the only one complaining. My cousin who has a white-collar job also complains about his rising bills,” laments Saravanan.

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Rising inflationary pressure is a global phenomenon as the world battles with pent-up demand and higher business costs, post-lockdown.

Like Malaysia, the world was not prepared to handle supply constraints, logistics issues and higher-than-expected demand as economic activities returned to normalcy.

Canada recently reported an inflation rate of 6.7% for March, the country’s highest level in 31 years. The United States’ inflation also surged to a new four-decade high of 8.5% in March.

Meanwhile, consumer prices in the 19 countries sharing the euro currency rose by a record-high 7.4% in March.

Rising tide: Customers buying their daily essentials at a supermarket in the city centre. Between December 2019 and February 2022, the price of five kg of cooking oil increased by almost 41% from RM20.98 to RM29.54.Rising tide: Customers buying their daily essentials at a supermarket in the city centre. Between December 2019 and February 2022, the price of five kg of cooking oil increased by almost 41% from RM20.98 to RM29.54.

Back in Malaysia, the inflation print for March is recorded at 2.2%, well below what was seen in the Western world.

Excluding fuel, the inflation rate was slightly lower at 2%.

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A major reason for Malaysia’s still-palatable headline inflation level is the government’s subsidy bill.

In 2022, the government is expected to spend RM28bil for fuel subsidy alone, as compared to just RM11bil last year.

However, despite the huge subsidy, Malaysians have continued to complain about the rising cost of living.

There are valid concerns that the consumer price index (CPI), which measures inflation, does not accurately reflect the actual cost of living on the ground.

Data from the Statistics Department can testify to this.

Between December 2019 and February 2022, the price of many common consumer goods has increased.

For example, the price of five kg of cooking oil increased by almost 41% from RM20.98 to RM29.54. The price of one kg of tomatoes also increased by 30.6% from RM5.19 to RM6.78.

Meanwhile, the price of one kg of chicken rose by 17.8% from RM8.03 to RM9.46, and the price of one kg of beef climbed by 11.9% from RM31.95 to RM35.76.

Lee Heng Guie SERC: “Inflation can cause real wages to fall, even when workers receive a pay rise.”Lee Heng Guie SERC: “Inflation can cause real wages to fall, even when workers receive a pay rise.”

Should we worry about inflation?

Inflation is not necessarily negative. When it remains under control, inflation is often seen as a sign of a prospering economy.

Inflation also helps to boost economic growth as consumers prefer to spend now, if they expect prices to increase in the future.

The problem starts when inflation goes out of control, or when wages do not increase in tandem with consumer prices.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie says that inflation could cause real wages to fall, even when workers receive a pay rise.

“When this happens, people’s purchasing power drops. You can only buy fewer items with the same amount,” he tells StarBizWeek.

Rising inflation is made worse by lower increases in salaries. Annual increments have been consistently dropping in Malaysia over the past several years.

Data provided by the Malaysian Employers Federation (MEF) shows that executives in the country received an average pay hike of 4.4% in 2021, as compared to 5.15% in 2019.

For non-executives, the average salary increase in 2021 was 4.43% from 4.96% in 2019.

In 2022, MEF’s survey has forecast that the average salary increase for executives and non-executives would be even lower at 4.37% and 4.17%.

So, the big question would be whether Malaysians are able to withstand the impact of inflation, especially at a time when the savings of many workers have been drained?

Wellian: There is no such thing as a free lunch, and the continued subsidy scheme weighs on the fiscal health.Wellian: There is no such thing as a free lunch, and the continued subsidy scheme weighs on the fiscal health.

Malaysia University of Science and Technology or MUST professor Geoffrey Williams says that the inflationary pressures globally and in Malaysia are concerning.

However, he also notes that Malaysia’s core inflation and inflation without oil are both relatively low. The country’s fuel subsidy and price controls have helped to contain inflation, he says.

However, if the high crude oil and food prices are prolonged, Williams warns that “problems will emerge.”

“Companies making price-controlled goods would stop supplying, or petrol subsidies would become a burden on government spending.

“We will also see problems if austerity measures in the United States and Europe damage global growth, or if the lockdowns in China affect growth, particularly in Asia.

“Then we might not see the recovery of the economy and incomes in Malaysia that we hope for, and so living standards will fall due to a combination of low inflation and stagnant incomes,” he adds.

In a note issued yesterday, MIDF Research says that Malaysia’s inflationary pressure remained stable in March.

It adds that March’s non-food inflation stayed on deceleration mode with a rate of 1.3% year-on-year (y-o-y), which is the lowest rate in over a year.

In contrast, food inflation increased further in March to more than a four-year high of 4% y-o-y.

Pointing out that the global food CPI is at a 10-month high, MIDF Research says that Malaysia would experience higher local food prices as a result of rising global food prices.

Williams: In the long term, we need liberalisation of markets and removal of restrictions.Williams: In the long term, we need liberalisation of markets and removal of restrictions.

This is primarily because of Malaysia’s status as a net importer of most food products.

“We upgrade our CPI forecast (for 2022) to 2.5% from 2.1%.

“Following the surge in global commodity prices, we opine that Malaysia’s inflationary pressure is to be affected indirectly, especially via higher food inflation at 3.5% (initial projection: 2.3%).

“Since the government is to continue with its fuel subsidy mechanism, we foresee fuel inflation to remain decelerating and putting non-food inflation to stay low at 2.1% in 2022 (2021: 2.8%),” states the research house.

The current round of inflationary pressures remains out of the government’s control, as it is largely sparked by external factors.

These include the Russia-Ukraine war, China’s “zero-Covid policy”, the global supply chain disruption and logistics issues.

SERC’s Lee and AmBank Group’s chief economist Anthony Dass expect another round of price hikes to happen in the coming quarters.

Lee says items that are currently not covered under any price-controls would be affected by the price hike.

“It all depends on how long businesses can continue absorbing the additional input costs. If they can’t, another round of price hikes would happen.

“Industries are paying for fuel at market price without subsidies, so the rise in global crude oil prices has been affecting their margins.

“The ringgit has also weakened quite a lot in recent times. This would affect producers who pay for their imported raw materials using the US dollar,” he says.

Dass: The underlying inflation is rising much faster than the eco- nomic growth, and it is worryingDass: The underlying inflation is rising much faster than the eco- nomic growth, and it is worrying

Meanwhile, Dass anticipates producers to transfer another 10% to 30% of their additional costs to consumers from July onwards.

Referring to the stark difference between Malaysia’s headline inflation and the producer price index (PPI), he says that producers have been absorbing most of the additional costs.

In February 2022, the PPI rose 9.7%, while the CPI rose by just 2.2%.

“In the first quarter, the producers transferred about 10% of their increase in input costs to the consumer.

“But with the Russia-Ukraine war and the supply disruption originating from China’s lockdown, businesses’ input costs have increased further.

“I have met businesses ranging from micro, small and medium enterprises to large multinational companies, many of them have no choice but to increase the product prices,” he says.

When asked whether Malaysia could fall into the stagflation trap, Dass believes it is unlikely.

In simple terms, stagflation refers to a condition where inflation keeps rising at a time when the economy stagnates.

Dass, who is also a member of the Economic Action Council secretariat, projects the headline inflation to be around 2.8% to 3% in 2022.

Meanwhile, the Malaysian economy is poised to grow by 5.6%, with an upside of 6% and downside of 4.8% in 2022.

However, Dass cautions that the country’s “underlying inflation”, which is the retail selling prices of goods and services, is rising much faster than the CPI.

This has really hurt the households’ buying abilities, he notes.

“Using this concept, the underlying inflation is rising much faster than economic growth. And it is worrying.

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“If left unchecked, it will hurt private consumption and flare up household debt, risking a spike in non-performing loans, bankruptcies, delinquencies and provisioning.

“It will have a snowball effect on business expansion and investors,” he says.

Based on the concept of underlying inflation, Dass acknowledges that “there is more truth for Malaysia to potentially fall into stagflation”, if the issue is not addressed quickly.

What to do?

Price-control mechanisms, currently implemented in Malaysia to control the price of poultry products, among others, are merely stop-gap measures to combat inflation.

A prolonged period of price controls would have unwanted negative effects on the economy, sparking lower production of goods as producers “retaliate” against such policies.

Meanwhile, subsidies come at the expense of the government, which already has a limited fiscal space.

OCBC Bank economist Wellian Wiranto says that domestic inflation remains buffered mainly due to ongoing fiscal subsidies.

“Of course, there is no such thing as a free lunch, and the continued subsidy scheme weighs on the fiscal health.

“Even if the gap can be plugged by Petronas through more dividends, it just makes Malaysia’s fiscal health all the more entwined with the fate of the hydrocarbon, which can be a medium-term problem especially in an era of decarbonisation drive,” he says in an email reply.

Typically, governments reduce their fiscal spending in times of inflation to avoid contributing to demand-pull inflation.

At the same time, central banks would tighten their policies by raising the benchmark interest rates to reduce the money supply in circulation.

One can already notice how monetary policy authorities in the United States and Europe are turning more hawkish in the fight against inflation.

In Malaysia, there are expectations that Bank Negara would begin raising the overnight policy rate (OPR), which is currently at a record-low of 1.75%.

However, SERC’s Lee says that any hike in the OPR should be at a “gradual and measured” pace.

OCBC’s Wellian also thinks that Bank Negara would avoid a protracted and extensive rate hike cycle.

“Even though we see Bank Negara raising rates this year to help counter the incipient inflation pressure, it will be a relatively measured move at just one rate hike coming in the third quarter,” he says.

However, MUST’s Williams says that increasing interest rates in the current environment will not impact prices and will make the supply-side problems worse.

“Bank Negara has already cautioned us on business debt and consumer debt is also a problem.

“So, the OPR should remain unchanged.

“While the growth picture is subject to uncertainty, especially in global demand, I don’t see a recession. But we might see slower growth than official forecasts,” he says.

Williams highlights that the government has handled the inflation problem “reasonably well”, although he concurs that price controls are not a long-term solution.

“In the long term, we need liberalisation of markets, removal of restrictions such as approved permits and other import regulations.

“We also need competition policies to remove uncompetitive even monopoly activity in the marketplace, especially for food,” he says.

AmBank’s Dass and SERC’s Lee also echo a similar stance, calling for immediate structural reforms.

Dass says the government must be bold to institute structural reforms to rebuild buffers and secure a more sustainable growth path, especially in the post-pandemic recovery phase.

“Reforms attract quality investment, build innovation capacity, enhance economic complexity and strengthen social protection, and effective implementation, supported by robust monitoring and evaluation mechanisms will be key to ensure that the desired outcomes can be achieved successfully.

“It is important to note that two emerging growth themes are sustainability and digitalisation,” he says.

Meanwhile, Lee says Malaysia needs medium to long-term supply-side policies that foster freer market entry and deregulation.

These would help contain inflation and anchor inflation expectations.

Lee calls for the reduction of high import dependency on agricultural commodities.

“For example, smart technology farming and large-scale food production as well as downstream processing to reduce food imports.

“Agricultural logistics and delivery systems along the whole supply chains should be strengthened to curtail the influence of the middlemen,” he says.

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