Food and transportation main drivers of inflation - experts

 

Various combinations of factors are influencing the rise in inflation index, which rose to 127.4 in June 2022 from 123.2 in June 2021, according to Bank Islam Malaysia Bhd.

Its chief economist, Mohd Afzanizam Abdul Rashid told Bernama that the rise in the inflation rate by 3.4 percent year-on-year has been expected given the rising cost of raw materials, especially imported ones, and strong demand.

“To some degree, the bottleneck in the supply chain and lack of labour supply, especially foreign workers, could also affect the efficiencies and productivity of the economy.

“There is no quick fix to these problems as the issues are multi-dimensional. Therefore, it requires various policies to address them,” he said.

Mohd Afzanizam noted the central bank has been raising the policy rate to clamp down demand-pulled inflation.

This should happen otherwise it would result in further pressure on aggregate demand which leads to further inflation, he explained.

“Other policies, especially on labour, would also need to come into play such as the availability of foreign labour in key sectors so that it can resolve the bottleneck that can affect productivity.

“Also, there is a need to observe any unscrupulous business practices such as hoarding, profiteering, and price manipulation that can exacerbate the price pressures,” he said.

The economist said, therefore, that multiple angles and better coordination are required to address these issues.

Food price inflation

He opined that the main driver of the increase in inflation comes from food and non-alcoholic beverages as well as transport with both items rising 6.1 percent (May: 5.2 percent) and 5.4 percent (May: 3.9 percent), respectively.

These accounted for a big chunk of the consumer price index (CPI), he said, adding that core inflation was also higher by 3.0 percent from 2.4 percent previously.

On the same note, MIDF Research, in its Economic Review for June 2022, noted that the overall headline inflation rate for the first half of 2022, which averaged 2.5 percent against 2.3 percent y-o-y, was still within Bank Negara Malaysia’s (BNM) inflation forecast range of 2.3 percent to 3.3 percent.

It said food inflation, which increased 6.1 percent y-o-y, was partially caused by the depreciation of the ringgit versus the US dollar, as Malaysia is a net-food importer.

"We keep our average CPI forecast to 2.8 percent for 2022. In the environment of elevated global commodity prices, inflationary pressure in Malaysia is affected via higher food inflation.

"We expect food price growth to record 4.5 percent this year, among others, attributed to the removal of subsidies on several food items," said MIDF Research.

The research firm noted that the slight downward trend in global commodity prices may ease Malaysia’s food inflation pressure in the second half of 2022.

“Malaysia’s crude palm oil price has moderated from above RM6,000 per tonne in early June 2022 to below RM4,000 in July 2022.

“The overall inflationary pressure in Malaysia should remain stable, particularly with receding global commodity prices,” it said.

Surge in chicken prices

Meanwhile, OCBC economist Wellian Wiranto said the inflation rate in June 2022 was higher than the bank’s prediction of 3.3 percent and market investors' forecast of 3.2 percent.

He attributed this to the uptick in food prices, with the sub-index seeing a high print of 6.1 percent y-o-y (year-on-year).

"Within that, the surge in chicken prices presented the main push. Despite a continuation of the subsidy policy by the government, poultry prices increased by 17.2 percent y-o-y in June from 13.4 percent in May.

"Given how chicken comprises the largest bulk of meat consumed – 46.1 percent by the relevant CPI weight – its dearer cost hurts the most," he said.

Meanwhile, SPI Asset Management managing partner Stephen Innes believes that despite a portion of food subsidies easing some inflation pressure, Malaysia is not feeling the heat of higher than expected CPI.

"While there is little that BNM can do to ease supply-side food inflation, the government may need to broaden subsidies over the short term as this inflation hurts every class except for the very rich," he said.

On another note, he said there has been positive news with supply chains easing.

This includes news that Ukraine and Russia are signing a deal to unblock grain exports, relieve a global food crisis, and ease inflationary pressures.

- Bernama