Is the uptrend in prices a short-term phenomenon on economic reopening, or does it point to something more serious and global in nature?
INFLATION in Malaysia may not be as high as it is in the United States, which hit 8.6% in May, but many are watching the upside risks to inflation.
Is the uptrend in prices a short-term phenomenon on economic reopening, or does it point to something more serious and global in nature?
With most businesses still keeping stocks, inflation risks may not have worked their way through the economy yet.
Nevertheless, rising commodity prices are among the main upside risks to inflation.
Supply chain disruptions, rising business costs, labour shortages and demand-side pressures in terms of recovering demand, also lead to upside risks while the weak ringgit adds to costs and inflation pressure.
Worries over any removal of subsidies such as the hefty fuel subsidy, poses another layer of risks.
This could force the country to step up to a new cost base, with a full spectrum cost structure rewrite.
Malaysia must now recognise it cannot expect to retain the old cost paradigm.
The post-Covid 19 ecosystem is real, lest we choose to remain oblivious; the whole world is resetting, post pandemic, and this will entail a structural paradigm shift from the simplest activities to complex manufacturing processes.
The costs of product inputs have changed permanently and increased, due to defining events like the Russia-Ukraine war; these changes will drive adjustments across the value chain related to input costs.
Take the example of roti canai, where prices may have stayed the same but the person may have to order two instead of one, as the size of the bread has shrunk.
The supply chain economics from the wheat fields to the roti canai vendor to his consumer, will trigger consequent chain adjustments until a market equilibrium is found.
“Upside risks to higher and longer term inflation remains,’’ said Socio Economic Research Centre executive director Lee Heng Guie.
Oil price continues to remain elevated; despite news on production increases from the Organisation of Petroleum Exporting Countries, easing of Covid-19 measures in China has added another fillip to oil prices.
If oil prices reach further highs, testing even US$150 (RM660) per barrel, we will be staring at another round of inflationary uptick, said OCBC Bank (M) Bhd economist Wellian Wiranto.
Food is another key area to watch, with global markets still digesting the after-effects of the Russia war.
Against high fertiliser prices on concerns over the shortage of potash, there are fears that crop yields may get crimped globally as farmers are forced to cut back on the usage of fertilisers.
That could lead to further risks of supply shortage of food items, thus exacerbating food inflation that we are facing.
The risks to inflation are definitely on the high side, said Bank Islam Malaysia Bhd chief economist Afzanizam Mohamed Rashid.
Among the risks – the government decides to cut fuel subsidies, as they have done in the past, as well as the country’s heavy dependence on import sources in which the weakening of the ringgit will have a direct impact.
Maybank Investment Bank’s full-year forecast of an inflation rate of 2.7% implies that the monthly inflation rate will climb to over 3% from an average of 2.2% from January to April, 2022.
A key upside risk is the fuel price subsidy, said Maybank Investment Bank chief economist Suhaimi Illias.
A removal of every 10 sen per litre in fuel subsidy will lift the annual inflation by 0.3 percentage point.
The rising trend of food protectionism is another concern, exacerbating food commodity supply and price risks.
With food and commodity prices spiking, governments are tightening exports to safeguard domestic supplies, resorting to food protectionism.
Given the high cost of blanket subsidies, the government may be considering a more targeted approach; talk of a fuel subsidy mechanism has surfaced recently as the fuel subsidy is set to jump by 155% from RM11bil to RM28bil this year, said CGS-CIMB Research in a recent economic update.
Currently, retail prices for diesel and RON95 are only half of economic prices, based on calculations by CGS-CIMB Research.
This presents upside risks to CGS-CIMB Research’s inflation forecast of 2.5%, should the government decide to float fuel prices.
There will be an impact, in the coming months, with some food prices rising but currently, with the fuel subsidy in place, it may not be too severe, said Etiqa Insurance and Takaful Bhd chief market strategist Chris Eng.
For now, there is a possibility of higher dividends from Petroliam Nasional Bhd to help manage the huge fuel subsidy bill.
There are worries that once the stocks that businesses are currently keeping, have been exhausted, the full blast of inflationary effects will be felt at the consumers’ end, with the effects magnified by a rapidly strengthening dollar.
Difficult business conditions are going to cause a deep global recession where a stagflationary spiral is almost assured, said former Inter-Pacific Securities head of research Pong Teng Siew.
Many Covid-19-hit businesses are already facing tight working capital and unable to maintain their old inventory levels, even if raw material prices had not risen.We will see a supply crunch unfold; as a recession causes a decline in demand, this supply crunch will make it difficult for even demand destruction to restore equilibrium to prices in the normal manner.
Stagflation occurs when the inflation rate is high and the economy slows down.
Some think that rising concerns on these upside risks merely reflect the short-term effects of the economy reopening.
Considering that spare capacities remain ample in most industries, the risk of sustained inflation appears low, said Fortress Capital Asset Management Sdn Bhd chief executive officer Thomas Yong.
The next few months will be crucial in assessing how these risks to inflation will show up as most are convinced of their upside potential to do further damage.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.
