Downward trend: A customer picks vegetables at a market in Perak. December’s inflation was primarily pulled down by slower food, transport and personal care price rises.
PETALING JAYA: The country’s sticky core inflation, which has burdened policy makers in the fight against rising price pressures, is expected to finally lose steam in 2023.
AmBank Research said the projected slower growth of private consumption in 2023 may result in a lower core inflation rate this year.
However, the research firm also said that Bank Negara is likely to raise the overnight policy rate by another 25 basis points this year, largely driven by the “need to anchor core inflation”.
In 2022, the full-year core inflation was recorded at 3%, which was the highest reading since the inception of the data in 2015.
Core inflation measures changes in the prices of all goods and services without taking into account the volatile prices of fresh food as well as the administered prices of goods by the government
The Statistics Department reported recently that the core inflation in December 2022 was registered at 4.1%, marginally lower than the record-high 4.2% rate in November 2022.
Prior to December 2022, the country’s core inflation had been rising for 14 straight months.
“The latest slowdown in core inflation, in our opinion, is too early to conclude that core inflation may have peaked back in November 2022,” stated AmBank Research.
Looking ahead, AmBank Research cautioned that the risks are tilted to the upside.
This is considering that the country’s private consumption continues to be strong, judging from the higher distributive trade sales in the second half of 2022 (2H22).
On headline inflation, AmBank Research expects a “modest” 3% rate for 2023.
“The slowdown in inflation is partly reflecting on the ringgit, which has appreciated by 9.7% against the US dollar since the low of 4.75 seen in November 2022, while lower commodity prices also helped in containing the headline price pressure,” it said.
In December 2022, the headline inflation eased to a six-month low of 3.8% year-on-year, in line with Bloomberg’s consensus forecast of 3.9%. This brought the full-year inflation rate to an average of 3.3% as compared to 2.5% in 2021.
UOB Global Economics and Markets Research said that December’s inflation was primarily pulled down by slower food, transport, recreation services and culture, and personal care price inflation amid the year-ago high base effects.
This helped offset the persistent rise in restaurant and hotel price inflation and an uptick in housing, utilities and other fuel price inflation.
“In the absence of domestic policy changes for price-administered items, particularly fuels and utilities, we expect headline inflation to continue its downward trend towards the year-end. This will result in an average inflation rate of 2.8% for the entire year of 2023.
“Volatile global commodity and non-commodity prices, domestic policy changes, the persistence of post-pandemic demand and currency movement are key wild cards for our inflation outlook,” according to UOB.
The research house also noted the government’s move to maintain electricity tariffs for households and small businesses until end-June 2023, the continuation of the price control policy and chicken subsidies until a new targeted subsidy mechanism policy is finalised and the temporary permits given to import eggs.
“All these measures will somewhat help to contain inflation pressures in the short term while the government is still fine-tuning its targeted subsidy mechanism (including fuel subsidy), which is reported to be unveiled in a matter of months.
“Under a potential scenario of gradual fuel price hikes every quarter based on global crude oil price assumptions of US$80 (RM343) to US$90 (RM386) per barrel, it (the direct impact) could lift headline inflation to 4% in 2023.
“In another scenario of assuming that fuel prices are unchanged in 1H23 and then gradually raised in 2H23, headline inflation could be capped at 3.5%,” it said.
Meanwhile, MIDF Research said that the headline inflation would average at 2.3% in 2023, should the government keep the current fuel subsidy mechanism.
Moving into 2023, the research house said that supply-push factors on inflation are expected to soften. This is underpinned, among others, by the appreciation of the US dollar-ringgit rate, moderation in food prices, further easing in global supply chain pressures and lower commodity prices.
“With the focus on resolving the cost-of-living issues, we believe food inflation will ease slightly starting in the first quarter of 2023 amid government intervention on selected food prices.
“In addition, the ringgit is on an appreciating path as the Federal Reserve is signalling for a slower rate hike pace in December 2022 onwards, supporting in reduction of imported-inflation pressure as Malaysia is a net-food importer for most food products,” it stated.
