PETALING JAYA: Producer price index (PPI) inflation is expected to continue its uptick in the coming months, as higher costs for petroleum, petroleum-derived products, chemicals and liquefied natural gas continue to work their way through the supply chain, although the impact on consumer inflation is expected to be more muted.
OCBC senior Asean economist Lavanya Venkateswaran said the spike in June’s PPI was mostly related to the lagged impact of the Middle East tensions working its way through the supply chain.
On the pass-through to consumer prices, Lavanya said that while the cost pass-through has remained relatively muted since March 2026, headline consumer price index (CPI) inflation is expected to edge higher in the coming months amid pipeline price pressures.
“That said, we do not expect a sharp jump particularly because RON95 and diesel subsidies remain in place,” she told StarBiz.
The country’s PPI recorded its sharpest increase so far this year, rising 9.2% year-on-year (y-o-y) in June from 7.8% y-o-y in May. The mining sector remained the biggest contributor despite easing from the previous month, while manufacturing inflation accelerated to 7.2% y-o-y in June from 3.5% in May.
Upstream cost pressures also remained significantly higher than those for finished goods, with crude materials for further processing (CM) rising 25% y-o-y compared with 7.4% y-o-y for intermediate materials, supplies and components (IM), and 2% y-o-y for finished goods.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid said June’s PPI data suggested higher producer costs were still gradually filtering through the supply chain, with businesses passing on the increases in stages.
Mohd Afzanizam said the transmission of cost pressures is narrowing as the shock moves from CM to IM. He noted the gap of increase between CM and IM simply reflects their composition – energy is a large share of CM but a much smaller input into the broader IM basket.
That said, Mohd Afzanizam said the more telling signal here is the sequencing, where CM has begun to decelerate (from 31.5% y-o-y in May to 25% y-o-y in June), while IM is still climbing (from 3% y-o-y in May to 7.4% y-o-y in June). This, he says, indicates that “the earlier cost impulse is arriving downstream with a lag”.
“It appears the cost transmission is incomplete and gradual.
“Businesses did pass on some of the additional cost to their customers, but not entirely, and not all at once.
“Some of this is delay rather than absorption – firms smooth price increases over several months, in part to maintain their relationships within the supply chain, so the decision to raise prices is implemented gradually rather than in a single step.
“However, where competition is stiffest, some genuine margin absorption is likely as well,” Mohd Afzanizam said.
He pointed out that the degree of price control and subsidies are prevalent in the CPI universe with petrol accounting for 5.5% of total CPI weight. This would limit the cost pass-through in the prices paid by consumers. As such, he said CPI inflation is expected to be benign should the existing fuel subsidies remain in their current form.
CPI had slowed slightly in June, up by 1.9% y-o-y from May’s 2% y-o-y increase.
Looking at how intermediate materials and manufacturing costs continue to rise, Mohd Afzanizam said sectors like food and beverage (F&B) makers along with restaurants, transport and logistics operators as well as contractors are most likely to feel the squeeze, given their limited pricing power to pass on higher costs.
“F&B makers and restaurants’ input costs are climbing, but with staple price controls and cost-conscious consumers, there is a ceiling on what they can charge.
“Transport and logistics operators feel it too, especially since the move to targeted diesel – commercial fuel – no longer enjoys the cushion that retail RON95 still does.
“Contractors are exposed through steel and cement, particularly those locked into fixed-price contracts signed before costs rose. Even utility players face a timing mismatch: their fuel costs are up around 10%, but they only recover that through the tariff with a lag,” he said.
On the other hand, Mohd Afzanizam said sectors like upstream oil and gas (O&G), plantation and export manufacturers with differentiated products – electrical and electronics, semiconductors, specialty chemicals – are price-makers, allowing them to better preserve their profit margins.
“Upstream O&G and plantation players do not absorb these higher commodity prices – they earn them,” he said.
“Meanwhile, export manufacturers with differentiated products sell globally and invoice in US dollars, so they can pass costs on and tend to hold genuine pricing power. As for strong consumer brands, they sit somewhere in the middle.”
Mohd Afzanizam added that the ringgit’s strength this year “is quietly doing a lot of work, cushioning the importers of raw materials and intermediate inputs”, and is a “big part” of why the producer-price spike has not bitten into margins as hard as what the 9.2% figure might suggest.
Meanwhile, UOB senior economist Julia Goh said given the absence of excessive demand pressures, any cost-pass through to consumers from higher producer prices are expected to be moderate.
“We expect headline inflation to remain manageable in the coming months, as we assume no further changes to the subsidy policy,” she said.
