All eyes on inflation outlook

PETALING JAYA: The outlook for inflation is still choppy but elevated despite a drop in the headline consumer price index for September, with many economists pegging in a 25-basis-point interest rate hike in the final monetary policy committee (MPC) meeting for the year next month.

According to the Statistics Department that showed headline inflation has slowed down year-on-year (y-o-y) to 4.5% for September 2022, core inflation in turn picked up to 4% y-o-y compared with 3.8% in August.

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More importantly, however, the data showed that headline inflation had decelerated by 0.1% in September, compared to 0.2% and 0.4% in August and July, respectively.

The headline inflation gauge takes into account the whole basket of goods and services produced by a nation’s economy for the period in review, while core inflation removes items whose prices fluctuate more wildly – usually food and petrol – from the equation.

While it may be encouraging that inflation had eased up month-on-month from July to September, Public Investment Bank Bhd (PIB) Research believed it may be too early to tell of any trend considering ongoing – albeit dissipating – supply chain disruptions.

In a note yesterday, PIB Research said: “More serious effects of inflation on the economy are still being mitigated by ongoing price subsidies, though the government has also started to adjust ceiling prices of various goods.”

The research house said economic growth has slowed down in the United States and China, with the US facing the effects of rapid and sustained Federal Reserve rate hikes.

And as supply disruptions continue to to dissipate, it expected domestic economic activity to remain steady heading into 2023.

“We lift our expectations of the CPI expanding by 3.4% y-o-y in 2022, against 2.5% for 2021, with headline inflation readings likely to trend lower from current levels in the months ahead,” said PIB Research, putting its estimate in the range of the 3.3% forecast by the Finance Ministry.

Despite pegging its 2022 whole-year inflation projection at 3.3%, Maybank Investment Bank Bhd (MIB) Research predicted that prices of goods and services could increase by up to 4% in 2023.

This will be underlined by the impact of the announced rationalisation in price subsidies for essential food, fuel and energy, as well as the expected gradual adjustments in fuel prices and electricity tariffs due to subsidy reviews in 2023, it said.

“With the continued elevated inflation rate and improving job market condition signifying faster real gross domestic product growth in third-quarter 2022 (3Q22), we expect Bank Negara to raise the overnight policy rate (OPR) further by 25 basis points to 2.75% at the November 2022 MPC meeting.

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

Asia-Pacific economists at Coface Services South Asia Pacific Pte Ltd, Bernard Aw and Eve Barre, opined that while moderating commodity prices is cooling down Malaysia’s inflation, the decline is unlikely to gain pace in the coming months.

“In September, a slower – but still rapid – rise in food prices helped the headline figure to slightly decelerate to 4.5%. But without accounting for food prices, the CPI has accelerated to 3.6%, among the strongest pace in four-and-a-half years.

“Notably, services CPI hit 4%, the highest since 2015, reflecting that the pass-through of higher material costs has broadened out to a wider range of goods and services,” they told StarBiz.

Aw and Barre are also not advocating subsidy cuts, at least not in 2023, from the inflationary perspective, especially if oil prices stay around US$95 (RM449.87) per barrel. The WTI Crude was trending around US$85 (RM402.52) per barrel.

“The shift from a broad fuel subsidy scheme to a targeted one could have a notable impact on Malaysia’s inflation, especially given the high share of transport (14.6%) as well as housing and utilities (23.8%) in the calculation for CPI.

“Therefore, we expect the government to delay any plans to implement a targeted subsidy initiative,” they noted.

Moving forward into 2023, Aw and Barre are of the view that the expected global economic slowdown in the coming quarters should continue to alleviate supply chain issues.

They said the latter will also evolve according to the developments of the Ukraine-Russia conflict and the zero-Covid situation in China, as it appeared clear during this year’s National People’s Congress that the Chinese government will maintain its strict Covid policy in the months to come.

Consequently, they said, supply chain disruptions constitute an upside risk to inflation globally, including in Malaysia.

Meanwhile, economist for Malaysia University of Science and Technology Professor Geoffrey Williams said oil prices staying around the US$90 to US$95 (RM426.19 to RM449.87) levels – which is roughly 25% lower than March prices – coupled with the decline in other input costs, including wholesale food production costs, should help ease inflationary pressures.

However, with higher prices in the CPI usually being in the form of increases in oil, food and utility, Williams cautioned that the increase in prices at present has become more broad-based, which could be a concern.

For example, prices have gone up by 5.3% for the transport sector, 4.4% for household maintenance products and services and 3.1% for recreational services y-o-y in September 2022.

On whether the targeted subsidy initiative by the government would contribute to rising prices in 2023, Williams concurred with Aw and Barre by saying: “While oil prices have declined, they may not have fallen enough yet for us to remove subsidies.

“Prices might rise too quickly if they are removed too soon and we would get higher inflation. This means we are not ready for targeted subsidies yet and there is still no mechanism for it.”

This views from economists echoed MIB Research’s inflation forecast of 4% for 2023.

TA Research and CGS-CIMB Research, in the meantime, are forecasting Malaysia’s headline inflation rate to hover around 3.1% for the whole of 2022.

CGS-CIMB Research said in a note: “In the coming months, we expect the country’s headline inflation to moderate, attributed to the dissipating low-base effects in 2021, as well as lower global commodity prices.

“Government intervention on administered items such as chicken price, petrol and toll fees will contain inflation costs in the near term.”

While raising a cautionary note about subsidy reviews, the research house is nevertheless predicting a modest inflation rate of 3.2% for 2023.

It pointed out that the direction of core inflation seemed to suggest a stronger demand-pull, with components such as the recreation, restaurant and hotel sectors seeing sustained pressures.

Like MIB Research, both TA Research and CGS-CIMB Research are also of the opinion that Bank Negara would be increasing the OPR in its next MPC meeting by another 25 basis points to continue curbing inflation.

Meanwhile, Hong Leong Investment Bank Research believed the central bank would maintain the OPR.