Battle against inflation not over yet

THE inflation situation has not improved yet despite major central banks having been aggressively tightening their monetary policy since the early part of the year.

Last week, we saw the inflation numbers in the United States continuing to stay high, despite the Federal Reserve’s (Fed) aggressive monetary policy tightening, declining commodity prices and improvement in the global supply chain.

And inflation numbers from the United Kingdom, eurozone and Malaysia continued to show inflation remaining stubbornly high.

For example, inflation in the UK rose by 10.1% year-on-year (y-o-y) in September, slightly above consensus expectation of 10.0% y-o-y. This is the first double-digit increase since February 1982.

Despite energy prices receding from 52% y-o-y in August to 49.6% y-o-y in September, the main impetus for the higher inflation came from higher food prices that continued to accelerate from 13.4% y-o-y in August to 14.8% y-o-y in September.

Prices for housing utilities, which consume around 14% of the overall consumer price index (CPI) weightage also accelerated from 20.0% y-o-y in August to 20.2% y-o-y in September.

Core inflation, which excludes volatile energy, food, alcohol and tobacco, was up 0.7% month-on-month, which is faster than the all-year average of 0.6%.

Inflation rises

On a y-o-y basis, core inflation accelerated from 7% to 7.5%, which is higher than the all-year average of 6.1%.

The news did not go well among investors, as the pound sterling dropped by 0.26% to trade around 1.1298 against the greenback after the CPI publication.

Against the ringgit, the pound also dropped from 5.3476 to 5.3340 after the CPI publication, translating to a 0.25% drop.

The inflation situation in the UK is expected to stay high until 2023 and will be higher than other Group of Seven or G7 members based on the International Monetary Fund’s (IMF) assesment.

The IMF forecasts inflation in the UK will be at 11.3% y-o-y for 2022, and 6.3% y-o-y in 2023.

With inflation remains stubbornly high, the door for rate hikes remains wide open for the Bank of England (BoE).

We expect the BoE to make another 50/75-basis point (bps) rate hike in the upcoming meeting on Nov 3, and another 50/75 bps rate hike in the final meeting in December.

This will push the interest rates to 3.25% to 3.75% by the end of the year.

The inflation situation in the eurozone is not looking good either, as the latest number shot up to 9.9% y-o-y in September.

It is the highest reading since the data was first collected in 1991. Core inflation also accelerated from 4.3% y-o-y in August to 4.8% y-o-y in September.

Food prices climb higher

The main impetus for the higher inflation was higher food prices, increasing to 13.8% y-o-y (August: 12.4% y-o-y), and energy prices increasing 40.7% y-o-y (August: 38.6%).

Inflation in the eurozone will likely stay high, as energy prices are expected to remain elevated with the winter season approaching.

Geopolitical tensions led Russia to cut off its natural gas supply to the continent.

With this latest development, we expect the European Central Bank (ECB) will opt for a larger rate hike in the upcoming meeting on Oct 27.

We now expect the ECB to hike by 75 bps, in both October and December meetings, bringing the financing rate to 2.75% by the end of 2022.

Closer to home, inflation numbers for Malaysia in September receded from 4.7% y-o-y in August to 4.5% y-o-y in September.

This brings the year-to-date average to 3.3%, which is above Bank Negara’s forecast range of 2% to 3%.

Core inflation, which excludes prices for administered and volatile items, increased from 3.8% y-o-y in August to 4% y-o-y in September.

This brings core inflation to average at 2.7% so far this year.

What concerns most Malaysians right now are food prices. As of September, food prices increased by 6.8% y-o-y, bringing the year-to-date average to 5.3%.

This will be the highest reading since mid-2009.

Without government intervention such as subsidies and price control, we believe prices for these items will be much higher than the current reading.

Upside on inflationary pressure remains.

The high input costs reflected by freight charges, labour costs, materials costs and other input costs are still working on the inflation numbers upwards.

Ringgit down

And adding fuel to fire is the weak ringgit. The ringgit has depreciated by 13.3% year-to-date against the dollar.

This is hurting importers and is expected to potentially add pressure on exporters as their input cost rises.

The weak ringgit may not necessarily boost the country’s export competitiveness, as the wage cost is on the upside due to labour shortages.

Malaysia’s high input cost is reflected by the producer price index (PPI).

In August, the PPI rose 6.8% y-o-y, slightly lower compared to 7.6% y-o-y in July, and lower than the year-to-date average of 9.8%.

Looking into the details, the PPI for food increased by 12.2% y-o-y, which is slower than the previous month of 15.4%, but still higher than the year-to-date average of 16%.

The slowdown is reflecting the improvement in the global supply chain since April this year.

But the weaker currency could cause the PPI to stay relatively higher in the months to come.

Like other countries that are still battling inflation, monetary policy tightening is not expected to end soon.

On that note, Bank Negara has raised rates by a total of 75 bps in 2022 to bring the policy rate to 2.50% and is now expected to institute another 25-bps hike in its overnight policy rate (OPR) in November.

We expect Bank Negara to raise rates by another 25 bps in January 2023 to settle the OPR at 3%, a rate seen prior to the Covid-19 pandemic.

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