PETALING JAYA: The inflation outlook faces persistent upside risks from higher energy and commodity prices, geopolitical tensions and potential weather-related disruptions, while strong export growth could moderate later in the year amid high base effects and a tougher global environment.
UOB senior economist Julia Goh said macro headwinds such as the potential re-escalation of geopolitical tensions in the Middle East and their impact on global commodity prices; weather-related supply disruptions associated with a possible Super El Nino episode in late-2026 to early-2027, as well as unfavourable base effects, continue to pose upside risks to inflation.
“We have endured more than six months of higher energy prices. Higher energy costs have to show up somewhere in the economy, either absorbed by producers, subsidised by the government or passed onto consumers.
“With producer prices at 9%, we expect some of this to be passed on and reflected in consumer prices. The extent of the cost pass through may be less severe, given the absence of excessive demand pressures and moderate wages,” she told StarBiz.
Socio-Economic Research Centre executive director Lee Heng Guie expects the consumer price index (CPI) to increase by 1.9% year-on-year (y-o-y) in August, mainly driven by food and beverages, housing, rental and utilities as well as information and communication.
Lee said transport prices are buffered by fuel subsidies. Meanwhile, he added that consumer price pressures remain given the ongoing geopolitical tension, volatile prices in global energy and commodities markets.
That said, Lee noted while increasing business costs have transmitted gradually and partially onto consumers, the price pressure is not persistent and broadening.
“It is isolated to specific sectors rather than structurally embedded across the entire economy,” he said.
Overall, Lee projects CPI to increase between 2% and 2.5% in 2026, while also warning that Super El Nino weather could threaten food supply and heighten food inflation risks.
Inflation eased to 1.8% in July from 1.9% in June, with CPI rising to 137.1 points in July from 134.7 a year earlier. Core inflation – a measure of underlying inflation that strips out volatile and administered prices – also declined to 1.8% in July from 1.9% in June.
Sunway University economics professor Yeah Kim Leng said the “surprise” 0.1% point easing in July’s headline CPI to 1.8% month-on-month is unlikely to be repeated in August as oil prices remain elevated and businesses face rising cost pressures and a margin squeeze.
“An uptick of 0.1% point, reversing July’s decline, is expected for August. It points to continuing subdued consumer inflation despite rising producer prices, suggesting that businesses are facing challenges to raise prices amidst moderating demand and mixed consumer sentiment,” he said.
OCBC senior Asean economist Lavanya Venkateswaran, however, forecast the country’s inflation to remain “fairly benign” at 1.8% y-o-y in August, while export and import growth are expected to remain strong at above 30%.
According to Lavanya, inflation is likely to be driven primarily by the electrical and electronics (E&E) appliances segment, while broad-based subsidies should continue to cushion consumers from the impact of higher global oil prices.
“Domestic demand should remain relatively well supported into 2027 with consumption likely to remain the mainstay of domestic demand.
“Government subsidies should help shield households from higher prices, while the budget will be an important consideration that we will be watching closely, particularly in terms of the extent of additional fiscal support and subsidy spending,” she said.
In terms of exports, Goh said while another month of strong growth is expected in August, underpinned by strong E&E demand and commodity related exports, export momentum is expected to moderate in the later part of the year.
This is due to high base effects, potential disruptions from El Nino and the effect of heightened inflation and interest rates that could weigh on global investments and consumption, she said.
Lee estimates that exports will grow by 40.5% in August, largely driven by still robust demand for E&E products, especially semiconductor companies riding on AI-related demand.
“The global semiconductor industry is experiencing a massive, broad-based ‘strong price effect’,” he said.
Lavanya said strong exports will be an important growth buffer for the country in 2027, supported by expected continued strength in semiconductor demand.
Nonetheless, she cautioned the key downside risk is a broader slowdown in demand for AI-related products, which could weigh on the export outlook.
“Overall, we expect gross domestic product (GDP) growth to remain broadly resilient, with our forecast at 4.8% in 2027,” she said.
Barring a calamitous turn of events in the two regions embroiled in armed conflicts, and anchored by a moderating but still expanding consumption and investment-driven domestic demand, Yeah said the country’s export engine is likely to propel its GDP growth above the 5% mark this year.
“Other supporting factors include the resilient financial and banking sector and well-established supply chains across many industries,” he said.
