For 2022 as a whole, Malaysia’s headline inflation rate jumped 3.3% y-o-y compared to 2.5% in 2021. — Reuters
PETALING JAYA: As headline inflation eased to a six-month low of 3.8% year-on-year (y-o-y) in December 2022 from 4% y-o-y in November due primarily to slower food, transport and recreation services price increases, economists from various research institutions are seeing softer inflationary pressures for this year compared to 2022.
For 2022 as a whole, Malaysia’s headline inflation rate jumped 3.3% y-o-y compared to 2.5% in 2021, which is mainly attributed to food and transport price inflation, which is also a result of geopolitical unrest between Russia and Ukraine as well as global rising commodity prices.
On the other hand, core inflation, which is calculated by excluding the prices of goods and services that are more prone to fluctuations, remained persistent at 4.1% y-o-y in the final month of 2022, barely moving from the 4.2% in November.
Maybank Investment Bank (IB) Research attributed the sustained pressure of core inflation to pent-up discretionary spending and the demand effect of the economic reopening, originating mainly from restaurants and hotels, recreational services, furniture, household equipment and routine household maintenance.
Maybank IB Research believes that the tapering off of headline consumer price index (CPI) numbers in December is mirrored by Bank Negara’s decision to put a hold to its recent streak of overnight policy rate (OPR) hikes, maintaining the current level of 2.75%.
“However, there is still scope for further possible OPR hikes, depending on the growth and inflation situation. A key ‘wild card’ now is the effect of China’s earlier and faster-than-expected exit from its ‘zero-Covid’ policy and the reopening of its economy and international border. This is a major development that could result in potential upsides to growth and inflation against the baseline outlook,” said the research house.
At the same time, UOB Kay Hian (UOBKH) Research said in its note released last week that aside from any domestic policy changes for price-administered items, especially fuels and utilities, it expects headline inflation to continue its downward trend towards year-end, while acknowledging that volatile global commodity and non-commodity prices, domestic policy changes, the persistence of post-lockdown demand and currency movements are possible spoilers for its inflation outlook.
Commenting on December’s inflationary numbers, UOBKH Research said, “Core inflation decelerated for the first time in 15 months, tentatively suggesting that it had peaked at 4.2% in November. Nevertheless, December’s core inflation continued to stay above the headline inflation for the third month in a row and surpassed its 2016-2021 long-term average level of 1.4% for the 12th straight month.”
Notably, it added that for the whole of 2022, core inflation averaged 3%, a huge increase from the 0.7% of the lockdown-marred 2021, hitting the upper bound of Bank Negara’s forecast range of 2% to 3%.
The research outfit also noted that factors such as services inflation being kept at 4.4% last month – the highest level since October 2008 – on top of a seemingly stubborn core CPI pressure, would signal persistent price demand pressures in 2023.
Assessing the central bank’s rate hike situation, UOBKH Research said while recent global developments and country-specific factors suggest rising challenges for Bank Negara to hike further in the near term, it is nonetheless projecting one more 25-basis-point hike from Bank Negara to bring the OPR back to the pre-2020 level of 3% by the middle of this year, before taking a long pause for the rest of the year.
UOBKH Research is forecasting the baseline CPI to hover around 2.8% for 2023, though it conceded this assumption was subject to the targeted subsidy mechanism to be unveiled by the unity government later this year.
“Under a potential scenario of gradual fuel price hikes every quarter based on global crude oil price assumptions of US$80 (RM341) to US$90 (RM383) per barrel, the direct impact could lift headline inflation to 4% in 2023. In another scenario, assuming that fuel prices are unchanged in the first half of 2023 and then gradually raised in the second half, headline inflation could be capped at 3.5%,” it said.
Similarly, MIB Research and TA Research see inflation to be maintained at 3% in 2023, while Public Investment Bank Research is projecting CPI numbers to hover between 3% and 3.5%
Geoffrey Williams, economics professor at Malaysia University of Science and Technology, meanwhile, is more optimistic that the prices of goods and services would fall further, telling StarBiz that he expects inflation to dip to approximately 2.5% by the middle of 2023.
Williams said domestic factors such as the freeze on utility tariffs which will affect all households and 98% of companies will help keep inflation down.
“International prices are also falling. Oil is around the level seen this time last year, so this will stop pushing inflation. In the middle of the year, oil price inflation is likely to be negative due to the base effect of the fall from the peak of US$120 (RM511) to US$130 (RM554) last year, and this would have an effect on many prices and costs, especially freight and international transportation costs which have already fallen,” he pointed out.
Furthermore, he also anticipates a pullback in food inflation, but cautioned that it may not necessarily cause food prices to fall, and instead Malaysians would see prices of food rise at a slower rate.
“Greater competition in the food market and opening up to imports is improving supply as we have recommended, so we hope this will normalise food prices. International food prices are also falling. (Minister of Economic Affairs) Rafizi (Ramli) is correct to encourage smart consumers to shop around, this will improve the market correction process,” he opined.
Williams hopes utility prices can be maintained or even reduced, as he believes costs should be falling, saying that if utility costs were returned to previous levels, this could reduce inflation by 0.3%.
