PETALING JAYA: While the latest inflation data showed that food price increases were a main cause of the higher consumer price index (CPI) in April, the underlying reason for higher inflation has economists thinking that higher interest rates may not send inflation lower.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid noted that in April, the inflation rate rose gradually as reflected by the higher headline CPI by 2.3% year-on-year (y-o-y) after sustaining at 2.2% for two consecutive months.
“And the core CPI which exclude the administered prices has inched up to 2.1% y-o-y, suggesting that the undelying inflation is very broad-based.
“It looks like the higher inflation was very much due to cost push factors, and therefore, we do not think the central bank would resort to aggressive monetary tightening via a higher overnight policy rate (OPR),” Mohd Afzanizam told StarBiz. The Statistics Department has revealed that the CPI for April increased 2.3% y-o-y.
The increase surpassed the average inflation in Malaysia for January 2011 to April 2022, which was 1.9%.
On a month-on-month basis, the CPI increased 0.2%.
Chief Statistician Datuk Seri Mohd Uzir Mahidin explained that the increase in the price of food, which contributed the highest to the overall weight of the CPI, remained a major contributor to inflation.
“Inflation for this group increased 4.1% y-o-y in April 2022, with 89.1% of food items in the food and beverage group recording increases,” he said.
Mohd Afzanizam said further interest rates hikes in 2022 would be due to the need to re-align with the state of the economy – the central bank would not want to over-stimulate by keeping the OPR too low for too long.
“If such a condition continues (low OPR), this would result in financial imbalances such as excessive building of debt as the cost of borrowing is too low, as well as excessive risk-taking activities such as speculative activities in the financial and property markets. Also, there is a need for the central bank to build a policy buffer to have more space in the event of future negative shocks,” said Mohd Afzanizam.
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Regarding potential actions by the government to help address rising living costs, Mohd Afzanizam said the present subsidy schemes should be kept at status quo for now, to prevent additional shocks to the economy.
“But there is a need to communicate to the public that the present fuel subsidy scheme is not sustainable, and therefore, needs to be reformed. The possible mechanisms may be to float it (fuel prices) and redirect the subsidies via cash transfers or leveraging on technology such as MySejahtera in order to ensure a more targeted fuel subsidy system. The government really needs to do a thorough cost and benefit analysis before introducing the new system,” he explained.
In March, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said spending on fuel subsidies may reach RM28bil this year if global oil prices continue to trend above US$100 (RM439) per barrel.
There has been news on a targeted fuel subsidy mechanism that would replace the blanket subsidy approach to contain the fuel subsidy bill.
Meanwhile, Centre for Market Education chief executive officer Carmelo Ferlito said food price increases was likely to continue in 2022, due to the effect of the overall money creation which happened during the lockdowns in the recent past.
“Then, there are external macroeconomic factors such as the Russia-Ukraine war and China’s zero-Covid policy,” said Ferlito, adding that recent government measures affecting the poultry industry to try to contain inflation and ensure supply may not be effective.
Ferlito said price ceilings and the export ban, instead, were the perfect recipe for prolonging inflation and ensuring food insecurity.
“Only the removal of approved permits or APs can be considered beneficial in the fight against price tensions and to improve food security,” he said.
Ferlito explained that supply chain disruptions were caused by lockdowns, and those supply chain disruptions created price tensions, while general inflationary pressures have been generated by excessive money creation.
“Price tensions created by increasing demand met by insufficient supply are necessary to signal to the supply side that this is the moment to scale up. If the market is allowed to work, the price tensions will be resolved quicker, as the supply can recognise and exploit profit opportunities. With the scaling up of supply, prices can finally cool down,” he said.
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Ferlito pointed out that with price ceilings, profit expectations are frustrated, and suppliers would avoid investing in the necessary process of capital creation and subsequent production.
“With profit expectations domestically frustrated by price ceilings, poultry producers can look at foreign markets to keep producing in a profitable way. However, the ban on exports further stops the supply process of scaling up. Some producers may abandon the market – this means even higher prices,” he added.
While Ferlito thinks that the latest inflation data is likely to put pressure on the central bank regarding further rate hikes in 2022, he pointed out that the effectiveness of rate hikes on inflation would also depend on extra-economic factors like the political environment and the international scenario.
He reiterated that the think-tank would prefer to see the political will to cut government spending, rather than interest rate increases.
“For putting the economic recovery path on sound pillars, we need more private investments – which are based on market signals and may be discouraged by the tightening of monetary policy – than government spending, which is based on borrowing and the money printing press, and therefore strongly inflationary,” said Ferlito.
Regarding the issue of fuel subsidy rationalisation, Ferlito said with a general election looming, the government may remain anchored in populistic measures.
In April, besides food price increases, the Statistics Department stated that the higher CPI was also due to higher prices in groups such as restaurants and hotels (3.2%), transport (3%), furnishings, household equipment and routine household maintenance (2.7%), miscellaneous goods and services (1.8%) and recreation services and culture (1.3%).
Mohd Uzir had said in April, the increase in the food and non-alcoholic beverages group was largely due to an increase in the component for food away from home which inclined 4.4% (compared to 4% in March 2022).
“For instance, both satay and rice with side dishes recorded a higher increase of 7.1% (March 2022: 6.6%). Cooked vegetables and cooked beef increased 6.9% (March 2022: 5.7%) and 5.7% (March 2022: 5.2%), respectively. Meanwhile, food at home which refers to raw materials for cooking at home increased 4.1% y-o-y,” he said.
Mohd Uzir added that in April, all sub-groups in food and non-alcoholic beverages recorded increases.
Prices in the sub-group of milk, cheese and eggs increased 7.2% (compared to 7% in March 2022), followed by the increase in meat (6.2%), vegetables (4.5%) and fish and seafood (3.8%).
“The increase in vegetable prices was due to weather uncertainties, which have affected the maturity of vegetables and caused a decline in supply in the market. In addition, the incline in the price was attributed to the increase of fertiliser prices, logistics costs and labour shortage at agricultural sites,” he said.
Mohd Uzir noted that the government has implemented the Maximum Price Scheme for the 2022 Hari Raya Puasa Celebration Season (SHMMP) from April 26 until May 10, 2022 to stabilise the price of goods and ensure the availability of supply in the market.
“The implementation of SHMMP is expected to ease the inflation in May 2022 especially for the food group,” he said.
Regarding inflation in other countries, Mohd Uzir noted that the Eurozone inflation rate rose 7.4% in April 2022 (March 2022: 7.4%), three times above the European Central Bank target (2.0%).
He added that the inflation rate in the United States increased 8.3% in April 2022 (March 2022: 8.5%).
“In the Asia Pacific region, the inflation rate in Malaysia (2.3%) was higher than China (2.1%) but lower than Philippines (4.9%), Korea (4.8%), Thailand (4.7%) and Indonesia (3.5%),” he said.