PETALING JAYA: Inflation is expected to remain under control for the rest of 2026 and stay within Bank Negara Malaysia’s (BNM) projected range. However, there are a number of factors that could put some upward pressure on this key economic metric. These include food prices, services costs and possible weather-related disruptions.
IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said the recent pick-up in inflation did not signal the start of a sustained inflationary cycle, maintaining his full-year consumer price index (CPI) forecast at 2%.
“We do not expect a meaningful acceleration in Malaysia’s inflation during the second half of 2026 (2H26), and therefore, maintain our full-year inflation forecast at 2%,” he told StarBiz.
Mohd Sedek noted May’s inflation data showed price pressures remained broad-based but were not intensifying, with the composition of inflation shifting towards services while cyclical cost-push pressures moderated.
Transport inflation eased to 3.8% from 4.1% in April, while food inflation – the largest component of the CPI basket – remained contained at 1.4%.
“This suggests that imported cost pressures have yet to generate meaningful second-round effects across the broader economy,” he said.
According to Mohd Sedek, the increase in inflation during the second quarter was largely driven by higher global energy prices following the escalation of tensions in the Middle East, which raised transportation, logistics and production costs.
As such, he expects June’s inflation reading to remain relatively elevated as it reflects the delayed pass-through from those earlier energy price shocks.
However, Mohd Sedek believes the inflation outlook has improved since the end of June following the easing of geopolitical tensions.
“The easing of geopolitical tensions in the Middle East has allowed Brent crude oil to retreat and stabilise within the US$72 to US$75 per barrel range. If this trend is sustained, energy prices are unlikely to remain a significant source of inflationary pressure in the third quarter,” he said.
Lower crude oil prices, together with easing global shipping costs, should gradually reduce transportation, logistics and production costs, helping to ease imported inflationary pressures, he added.
Mohd Sedek acknowledged that a stronger US dollar could pose downside risks through higher import costs if it caused a material depreciation of the ringgit.
Nevertheless, he expects the disinflationary effects of lower global energy prices and easing supply-side pressures to outweigh any inflationary impact from a firmer greenback, provided the ringgit remains relatively stable.
Overall, he viewed the second-quarter inflation increase as “a temporary energy- driven cost shock rather than the beginning of a new inflation cycle”, adding that inflation should moderate after June and remain comfortably within BNM’s projected range of 1.5% to 2.5% this year.
Meanwhile, Socio-Economic Research Center executive director Lee Heng Guie was slightly more cautious, expecting inflation to edge above 2% during 2H26 as businesses gradually pass on higher operating costs.
He said headline inflation would likely be driven by higher food prices, services and transport costs, although fuel subsidies have helped cushion the impact of elevated global energy prices.
Lee also warned that weather conditions could become a significant inflation risk moving forward, if it materialises.
“The upside risk to food inflation could come (from a) high probability of strong El Nino conditions in 2H26 lasting through to early 2027,” Lee said.
Overall, he expects headline inflation to move closer to the upper end of BNM’s projected 1.5% to 2.5% range for 2026.
On a related matter, CIMB Research expects BNM to keep the overnight policy rate (OPR) unchanged at 2.75% at its upcoming Monetary Policy Committee meeting tomorrow, saying easing oil prices have further strengthened the case for an extended pause in interest rates.
The research house said headline inflation edged up to 2% year-on-year in May from 1.9% in April, while core inflation remained unchanged at 2%.
It added that inflation pervasiveness also eased to 44.8% from 51.4% in April, suggesting price pressures had become less widespread.
Although the recent inflation increase has remained concentrated in fuel and electricity, CIMB Research said broad-based pass-through to other sectors has yet to emerge.
It cautioned of second-round inflation risks remaining, estimating they could contribute between 60 and 70 basis points to food and core inflation over the next three quarters, as producer cost pressures gradually shift from raw materials to intermediate and finished goods.
On monetary policy, the research house reiterated any future interest rate hike would likely require both stronger economic growth and significantly higher inflation.
“We reiterate our call for an extended OPR hold, with a hike contingent on growth above 5% and inflation above 3%, which is not our base case,” CIMB Research said.
While food inflation exceeding 5% because of renewed Middle East-related disruptions or a severe El Nino episode could push headline inflation above 3% towards end-2026 or early 2027, CIMB Research said the continued absence of widespread cost pass-through currently supports the case for BNM to leave interest rates unchanged.
“It is also possible the continued absence of broader cost pass through would see inflation undershoot our current forecast. On balance, we think these risks continue to support the case for BNM to remain on hold, with a tilt towards a hike only if persistent inflation coincides with growth strengthening meaningfully above 5%,” it noted.
