Malaysia's core inflation pressure persists despite CPI down for two consecutive months, say economists

Malaysia's core inflation pressure persists despite CPI down for two consecutive months, say economists
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KUALA LUMPUR (Nov 25): Consumer prices have dropped for the second consecutive month in Malaysia.

The Consumer Price Index (CPI), a measure of inflation, fell 4% in October, albeit at a slower pace compared with the 4.5% drop in September, partly driven by lower pump price of RON97.

However, economists see the pressure on core inflation persisting in the near term, heightening the likelihood of more rate hikes, although they forecast inflation to soften in 2023.

UOB Global Economics & Markets Research senior economist Julia Goh and economist Loke Siew Ting commented that core inflation shows no signs of weakening at this point as the year-to-date reading of 2.8% is close to the upper bound of Bank Negara Malaysia's (BNM) average full-year 2022 forecast of 2% to 3%, signalling the persistent build-up of demand price pressure as the economy improves along with higher wages.

"This will justify further pre-emptive moves by BNM over the next couple of months to anchor inflation expectations amid a continuation of Fed (US Federal Reserve) rate hikes and domestic political resolution that paves the way for pro-growth policy and reforms.

"We reiterate our Overnight Policy Rate (OPR) call for a 25-basis-point hike at each of the next two monetary policy meetings in January (Jan 18-19) and March (March 8-9) next year, before taking a pause at 3.25% thereafter," they wrote in a note.

RHB Investment Bank Bhd, which kept its CPI inflation headline forecast at 3.4% for 2022 and 3% for 2023, concurred that robust domestic demand combined with low real interest rates will continue to fuel pressure on core inflation, while external pressure from Fed implies that OPR normalisation will continue in the coming months.

"Price pressure eased marginally for the month of October, but still remained elevated. There was slight relief from the supply side amid softening commodity prices in recent months. Demand side pressure stayed robust, driven by the continued strength in domestic demand," said RHB economist Chin Yee Sian and associate research analyst Wong Xian Yong.

In view of relatively strong domestic demand, MIDF Research raised its annual CPI forecast for 2022 slightly by 0.2% to 3%.

"In the environment of elevated global commodity prices, inflationary pressure in Malaysia is affected by higher food inflation. We expect food price growth to record +5.5% this year, among others, attributed to further depreciation of US dollar [against the ringgit]," said the research house.

For 2023, economists expect supply-push factors of inflation to soften, supported by anticipated firmer ringgit against the greenback, moderation in food prices, further easing of pressure in the global supply chain, and normalisation of commodity prices.

On top of that, they foresee the unity government led by newly appointed Prime Minister Datuk Seri Anwar Ibrahim to likely keep the current fuel-subsidy mechanism as status quo.

UOB's Goh and Loke projected that inflation in Malaysia will continue its downward trend through 2023, averaging at 2.8%, compared with the Ministry of Finance's estimate of 2.8% to 3.3%, assuming no changes in domestic policies, particularly fuel and electricity subsidies and the price cap for staple food.

"During the initial tabling of Budget 2023 on Oct 7, there was mention of a gradual move to targeted fuel subsidies in the fiscal report but it was not mentioned in [former Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz's] Budget speech despite the RM17 billion reduction for subsidies and social assistance.

"Hence, it will be one of the main issues in the coming retabling of [the] Budget 2023 in January/February next year," they said.

Further, the new government will give priority to addressing the issue of rising cost of living. Pakatan Harapan (PH) manifestos included reduction in toll charges, restructuring minimum wages, continued cash aid, incentives to increase food production, and tax cuts for investments in the farming sector, said Goh and Loke.

"In addition to that, volatile global commodity prices, prolonged supply chain disruptions, and currency movements remain wild cards for the inflation outlook going into 2023," they added.

Likewise, RHB's Chin and Wong said eyes will be on possible changes in fiscal and monetary policies, as well as profound implications for the inflation trajectory under the new government.

"We opined that subsidy adjustments might still be possible in view of the decent economic performance, which allows for some room for policy support recalibration and fiscal consolidation," they said.

As guided by the PH manifesto blueprint, MIDF noted, the PH-led government may review monopolistic practices on several agriculture-related items with the idea of increasing output supply and lowering food prices.

"If [the current fuel subsidies are kept as status quo,] headline inflation is predicted to hover +2.3%~2.5% for 2023," MIDF added.

Kathy Fong