Inflation woes to return

IT wasn’t too long ago that Malaysia appeared to be fighting high inflation like many other countries.

In the last one year or so however, inflation has cooled, and this is expected to carry on until year-end.

In 2022, the pace of consumer price increases was at about 4.2% but latest data puts it at 1.8%.

Easing global supply chain disruptions, for one, has been responsible for this ease in price spikes.

However, come next year, the risk of inflationary pressure will be back, due largely to the implementation of key economic reforms.

Socio-Economic Research Centre executive director Lee Heng Guie reckons there are upside risks to headline inflation next year given the anticipated fuel subsidy rationalisation as well as higher private and public sector wages.

“Inflation will increase by 2.5% to 3% in 2025 compared with the estimated 1.9% for this year,” he tells StarBiz 7.

Sunway University professor of economics and economics adviser to the government Yeah Kim Leng concurs.

“The inflation risk will rise next year with the raising of the minimum wage, implementation of the Employees Provident Fund contribution for foreign workers and further subsidy reforms. “Nevertheless, moderate inflation of 2.5% to 3.5% is projected for 2025 with downside risk that reflects global growth concerns amid elevated global uncertainties,” Yeah says.

He points out that despite threats of higher world oil prices due to ongoing armed conflicts, slowing global demand and a shift to renewables have so far continued to result in easing of prices, thereby lowering inflationary pressures.

Malaysia’s current inflation rate of below 2%, is reflecting these easing price pressures.

The current low and stable inflation is also supported by the ringgit’s strength which is helping to reduce imported price pressures.

“With the petrol subsidy rationalisation postponed to the middle of next year, the current low-inflation environment is expected to continue throughout the rest of the year,” he says.

Inflation, which is measured by the Consumer Price Index, looks at the rise in consumer prices of a nation, over a period of time.

Hence, it is a broad measure of the costs of living in a country.

Often though, there is a mismatch between its data and the real costs of living in society.

Feeling the pinch

Center for Market Education chief executive officer Carmelo Ferlito says in today’s context, this is because prices are not actually decreasing, but rather growing at a slower pace.

“People here are still feeling the pinch of inflation created mostly during the Great Lockdown as a result of expansive fiscal policies, which allowed the quantity of money to grow faster than output,” he says.

Essentially, this is what inflation is in proper terms – a persistent and generalised increase in prices due to the quantity of money growing more than the output of gross domestic product, he adds.

Since March 2020, prices have collectively risen by 10.17%. In particular, food and beverage prices rose by 15.73%, transport prices by 17.21% and restaurant and accommodation services by 15.32%.

“And this is what people are experiencing,” Ferlito says.

He says while rising geopolitical tensions may bring re-adjustments in relative prices, only a faster increase in the quantity of money can bring about higher inflation and a deterioration in the purchasing power of Malaysian households.

“Therefore, what needs to be kept under scrutiny is government spending and the way it is utilised.”

Ferlito points out that the recent Budget 2025 showed an increased allocation of cash aid (an additional 30% compared with the previous year).

“If not financed by revenues, this can be a source of inflation.

“Subsidy rationalisations, in turn, can potentially be inflationary depending on the amount of aid the government will deploy and how they will be financed.”

Moving forward, he reckons current monetary trends suggest a stabilisation of the general level of prices.

However, he adds freshly proposed fiscal consolidation measures do not seem to find effective ways of implementation on the spending side, at least from what is visible in the budget speech. “And this is what will create inflationary pressure.”

Bank Negara is expected to keep the benchmark overnight policy rate at 3% for the rest of 2024 and into the new year, to curb the anticipated inflationary pressure and to continue to support the strength of the ringgit.

The central bank has played a key role in the strengthening of the local unit, encouraging government-linked companies to repatriate their investment income, and convert these into ringgit.