Higher inflation to remain for several months ahead

KUALA LUMPUR: Headline inflation, which rose by an unexpected 4.5 per cent in February, is expected to persist for several months before tapering off, given that crude oil prices have recently stabilised.

Dr Yeah Kim Leng, Professor of Economics at Sunway University Business School said it is likely to ease in the second half of 2017 (2H17), if current oil prices are maintained or dip in the coming months.

“Consumer sentiment and spending may be dented slightly by the higher oil and food prices.

“However, given the steady employment and income growth, we expect consumer spending to continue at a moderate pace,” he told Bernama.

The CPI, a measure of inflation, rose by 4.5 per cent to 119.7 in February compared to 114.5 in the same month last year.

The average price of one litre of RON95 petrol was RM2.30 during the reviewed month compared to RM1.75 in the same month last year, while RON97 rose to RM2.60 from RM2.05.

Meanwhile, Affin Hwang Capital Research believes the headline inflation to average an estimated 4.0-4.2 per cent year-on-year (YoY) for the first half of this year, before trending lower to a projected 3.03.2 per cent in the 2H17.

For 2017, the research firm expects inflation to average around 3.5 per cent, higher than its earlier forecast of 2.7 per cent, but towards the mid-point of the official target of between 3.0-4.0 per cent.

“We believe the country’s headline inflation will likely remain manageable as global oil prices are projected to hover around the US$ 50- US$ 55 level per barrel, limiting any further upside to domestic retail fuel prices.

“Similarly, the depreciation of the ringgit to the US dollar may likely reverse and strengthen gradually towards 2H17, when Bank Negara Malaysia’s forex measures take effect, limiting the pass-through effect on domestic prices,” it said in a note.

As the increase in inflation is cost-driven, Affin Hwang said it does not expect a significant pass-through into the broader price trends, given healthy but not resilient domestic demand conditions.

It projected that the central bank would likely keep the three per cent overnight policy rate throughout 2017, despite some challenges on a potential increase in inflationary expectations. — Bernama