PETALING JAYA: Malaysia faces the risk of higher inflationary pressures from imported inflation in the medium term onwards, as such pressures could build up from US president Donald Trump’s import tariffs and other potential US trade barriers.
The RON95 subsidy rationalisation and a potential electricity tariff hike in the second half of the year are set to further fan inflation in the country.
However, economists said although the country could face the risk of higher inflationary pressures, it would still be manageable owing to the government’s proactive measures.
Some are suggesting more measures to be put in place to ensure consumers would not be burdened by higher inflation.
RAM Rating Services Bhd senior economist Woon Khai Jhek told StarBiz inflationary pressures could rise globally in the medium to long term, which poses risks for economies globally, including Malaysia.
RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek
He said production costs could rise globally as companies diversify supply chains and invest in new production facilities to navigate Trump’s import tariffs and other potential enactment of US trade barriers.
“These higher costs will eventually filter through to consumer prices worldwide, including in Malaysia, through imported inflation.
“Additionally, if Trump’s policies lead to further disruptions in global commodity markets or escalate geopolitical tensions, this could drive up prices for key inputs like energy and raw materials, adding another layer of inflationary pressure on Malaysia’s economy,” he said.
Woon said he is maintaining his inflation rate projection for 2025, expecting the full-year average to come between 2% and 3%.
“Theoretically, higher inflation can weigh on consumption spending, and in turn corporate performance.
“However, we expect these pressures to be mitigated by the targeted government subsidy and financial assistance for households and businesses, which will help cushion the impact on purchasing power and operating costs,” he said.
OCBC Asean senior economist Lavanya Venkateswaran.
OCBC Bank senior Asean economist Lavanya Venkateswaran said the bank’s base case is for headline inflation to average 2.7% year-on-year (y-o-y) this year versus 1.8% in 2024.
The bank’s assumption is that RON95 prices would be rationalised at the start of July 2025 by about 25%, adding 0.7 percentage points (pps) to the inflation headline this year.
“Our base case assumption does not account for tariffs on Malaysia’s exports to the United States.
“More broadly, the timing, magnitude of tariffs by the United States on key trading partners and global supply reconfigurations remains uncertain at this point, but we will continue to monitor the announcements from the new US administration.
“We are maintaining our 2025 headline inflation forecast for now. We expect average headline inflation of 2.7% y-o-y this year versus 1.8% in 2024.
“OCBC sees some scope for the firms to absorb some cost from a higher consumer price index (CPI), considering that producer price inflation fell by 0.4% y-o-y in November (versus a decline of 2.4% in October).
“The difference between consumer prices and producer prices (in percentage points terms) remains comfortable for now.”
Malaysia’s inflation moderated to 1.7% in December 2024, lower than forecast, with slower increases in the cost of personal care, social protection and miscellaneous goods and services, among other groups.
The country’s CPI in December showed slower expansion as compared to 1.9% in the previous month of November, but remained higher than the 1.5% increase from a year earlier in December 2023.
Analysts polled by Reuters had projected a rate of inflation of 1.8%.
This brought the annual inflation rate in 2024 to 1.8%, a second consecutive year of decline since 2022. Meanwhile, core inflation increased slower at 1.6% in December 2024 as compared to 1.8% in November 2024.
Bank Negara has maintained the overnight policy rate (OPR) at 3%.
MARC Ratings Bhd chief economist Ray Choy.
MARC Ratings Bhd chief economist Ray Choy said the resilience of consumption and services demand, comprising more than half of the gross domestic product (GDP), would continue to sustain inflation.
He said ongoing adjustments to RON95 fuel subsidies and the increase in the sales and service tax (SST) would further contribute to inflationary pressures.
“Beyond these direct effects, potential second-round inflationary impacts may emerge as retailers pass higher costs on to consumers, compounding already strong spending.
“Given these factors, we forecast CPI to rise to 2.6% in 2025.
“In Malaysia, while inflation is contained at a desirable level, it is still a concern to corporate Malaysia due to a confluence of risks that can erode profit margins, such as potential global tariffs, and a weaker exchange rate compared to the past for importers.
“While corporates may be tempted to pass the costs of inflation to the end-buyer, there is a limit to this, as it can eventually cause a decline in sales volume and overall revenue,” Choy said.
To ensure inflation won’t burden consumers etc., he said besides retargeting subsidies to minimise the impact of higher costs on lower income groups, as seen in the distinction between RON95 and RON97 fuel, and the continued tax focus on high-value luxury items, monitoring price levels and enforcing actions against profiteering can help contain inflation, though implementation may remain challenging.
At the structural level, Choy said the government’s evolving education and wage policies could enhance skills development for job seekers, leading to more competitive wages and strengthening the economy’s supply-side capacity.
“Expanding supply-side capacity increases consumer choices and keeps prices competitive, which is particularly relevant in industries with significant pricing power, such as monopolies and oligopolies,” he noted.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said to ensure that every government assistance would reach its targeted group, the government would need to push ahead with its economic reforms such as rationalising the blanket subsidies.
“However, implementing such measures can be an uphill task as there is a tendency that there would be pushback from the society due to concern over rising prices.
“In this regard, the new mechanism for allocating the subsidies has to be clear and the implementation has to be smooth.
“Prior to the implementation, there must be constant engagement and clear communication to the general public about the rationale of such a move and awareness about other programmes such as cash transfers programmes that would serve a means to cushion the impact.
“If the government can do this right, it would ensure buy-in from Malaysian citizens,” he said.
Afzanizam said strict enforcement on anti-profiteering law is also crucial in order to curb any malpractices such as hoarding and price manipulation.
Additionally, he said promoting financial literacy is vital as the general public will remain prudent in managing their finances. In a nutshell, he said addressing higher inflation is not going to be a walk in the park.
He believes Trump’s policies could also have direct impact on the US dollar. He said since Malaysia imports a sizeable share of agri-food products, it could result in higher imported inflation should the ringgit depreciate against the US dollar.
Afzanizam said based on all these factors, inflation rate could reach in the region of 2.5% for 2025 from 1.8% in 2024.
