Inflation likely to hover between 3% and 3.3%

PETALING JAYA: Economists are anticipating the inflation rate to hover between 3% and 3.3% this year, coupled with more interest rate hikes in the offing.

CGS-CIMB Research economist Nazmi Idrus said he is maintaining his 2022 consumer price index (CPI) forecast at 3.1%.

For 2023, his forecast for the CPI, a measure to gauge inflation, is 3.2%.

He expects stronger inflation on a year-on-year (y-o-y) basis in August-September this year, potentially reaching close to 5% before coming down in the fourth quarter (4Q22).

Driving the increase in the y-o-y numbers would be the low base effect as much of the Covid-19 pandemic-related support expires.

“That said, we believe price pressure is on the downside.

“Producer prices showed a percentage month-on-month (m-o-m) contraction in July this year of 2.3% (June 2022: contraction of 0.1%), likely reflecting the easing cost pressure amid the decline in global commodity prices.”

Nazmi said this could translate into easing price pressure on consumers, going forward.

“We expect a continued rate normalisation by Bank Negara with a 25-basis-point (bps) hike during the Monetary Policy Committee (MPC) meeting on Sept 8, followed by two more hikes in the first half of 2023.”

Headline inflation, measured by the CPI, rose to 4.4% y-o-y in July this year compared with 3.4% y-o-y in June, mainly on rising food and non-alcoholic beverages costs.

Core inflation stood at 3.4% y-o-y in July against 3% in June.

Meanwhile, Maybank Investment Bank (Maybank IB) Research tweaked its 2022 and 2023 inflation forecasts to 3.3% (previously: 3.4%) and 4% (previously: 4.1%), respectively, to incorporate year-to-date performance.

The forecasts also factor in the impact of announced and expected rationalisation in price subsidies for essential food, fuel and energy.

“With the upward trajectory in annual inflation rate plus stronger economic growth in 2Q22 and this year, we expect the central bank to raise the overnight policy rate (OPR) further by 50 bps to 2.75% by end-2022 (25 bps hike each at the Sept 7-8, and Nov 2-3, 2022 MPC meetings).

“We also expect another 25 bps hike early next year to bring the OPR back to the pre-Covid-19 level of 3% by the end of 1Q23,” it said.

PublicInvest Research expects domestic economic activity to remain steady in the second half going into 2023, amid dissipating pressures from supply chain disruptions and global inflation.

The latter helps to moderate driven-demand (food and restaurants) and supply-shock (transport) pressures, going forward.

“We maintain our expectations of the CPI expanding by 3% y-o-y in 2022 (2021: 2.5%) though headline inflation readings may trend higher in some months due partly to the base effect from support measures implemented last year.

“However, the overall readings for the year run the risk of being exceeded should supply-related disruptions be reignited.

“With the Russia-Ukraine war showing no signs of ending and possibly weighing on energy markets, effects are no longer expected to be as pronounced,” it noted.