Inflation may not be as bad as it seems

 

We have all had to pay higher prices in recent months and for those on lower incomes this has been particularly difficult. However, there is now some hope that inflationary pressures are receding.

Inflation in Malaysia, as measured by the change in the consumer price index (CPI), was 3.4% in June. This is higher than Hong Kong (1.8%), Japan (2.4%), China (2.5%) and Vietnam (3.1%) but lower than Taiwan (3.6%), Indonesia (4.9%), the Philippines (6.1%), South Korea (6.3%), Singapore (6.7%) and Thailand (7.7%). In the US, inflation has reached 9.1% and in Europe 9.6%.

Although inflation by this measure is low compared to other countries, it is high compared to the historical average of around 1.9% for Malaysia over the last decade or so.

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Bank Negara Malaysia (BNM) has maintained its forecast for headline inflation to remain between 2.2% and 3.2% for the year, whilst noting it may be higher in some months, such as we saw in June, mainly due to the base effect from electricity prices. Fortunately, electricity tariffs will not be increased for the nine million domestic users in the country for the rest of the year.

For underlying inflation, measured by core inflation, the BNM forecast is 2% to 3% in 2022. The lower-end of these forecasts now appears achievable based on global prices of major items affecting the CPI.

The price of crude oil has fallen between 20% and 25% now compared with its peaks in March. We are seeing these effects in the reduction of the price of RON97 from RM4.84 per litre in July to RM4.40 yesterday.

The prices of industrial products such as copper, widely used in electrical and electronics as well as construction, have fallen 29% since May and lumber prices have fallen 63% since March.

Crude palm oil (CPO) prices have fallen by around a third since April and Malaysian and Indonesian production has reached eight-month highs following the removal of supply restrictions. Palm oil is one of the main sources of cooking oil but is also used in a huge range of products, so price reductions will soon feed into the marketplace as supply recovers.

Wheat prices have fallen just under 38% since May this year and with Ukraine resuming exports we expect global supply to improve, at least in the short term, which will help prices moderate even further along with other agricultural staples. This affects both food prices for consumers and foodstuff prices for livestock which helps moderate food prices further.

Of course when it comes to the big chicken in the room, there is also good news. Agriculture and food industries minister Ronald Kiandee said in parliament last week that Malaysia is finally able to produce 106% of its self-sufficiency level in chicken.

This releases capacity to export to Singapore for example and allows poultry producers to make extra revenue in higher value markets. The oversupply of chicken has caused chicken prices to be lower than the ceiling price set by the government and signals a normalisation in the chicken market.

Expectations drive inflation and if we are told to expect higher inflation we are not surprised when prices rise even if there is no underlying cost push. So if we can see that underlying costs are falling it is reasonable to expect that inflation will moderate.

So it appears that Malaysia may have weathered the inflationary storm better than most and the combination of price controls and subsidies have done their job. Now we must look at structural reforms to improve competition and supply-side efficiency to ensure that inflation remains in check in the long-run. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.