Bracing for higher inflation
INFLATION serves as a barometer of a nation’s economic health, and for a country like Malaysia, fluctuations in the last few years caused by domestic and global influences have been seen as relatively normal.
As we entered 2024, experts and analysts gave the people renewed hope about a turnaround in the economy, mainly driven by trade exports and a recovery in the semiconductor sector, among others.
However, two months into the year, we’ve yet to see things pick up, but rather, a more sombering projection on Malaysia’s inflation rate has been revealed.
Speaking to Starbizweek, MIDF Amanah Investment Bank Bhd economist Abdul Mui’zz Morhalim says the country’s inflation rate is likely to hit 3.2% this year.
It is a significant increase from the 1.5% measured in December 2023 through the consumer price index (CPI).
Abdul Mui’zz says after taking into account the planned policy changes by the government, the higher numbers are a forecast of what we could be dealing with as 2024 progresses.
“The source of inflation will come from increases in non-food CPI components, mainly higher transport costs as well as the second-round effect from the domestic fuel price increases and other policy changes,” he says.
Fuel subsidies
He says one of the biggest key drivers in increasing the inflation rate will be the most-talkedabout fuel subsidies.
“Ultimately, we opine the magnitude of the fuel price increases will determine the exact impact on the inflation outlook,” he says.
According to him, the fuel price adjustment will be done gradually to avoid the sudden surge in inflation, while the government has been steadfast in committing to help those who are going to struggle with the cost of living and transportation issues.
“The government is also promoting efforts to boost local food production as part of the measures to contain food inflation.
“We agree with the push to encourage private-sector players to boost supply and stabilise the domestic supply chain such as exploring more productive techniques and building storage facilities for food products,” he says.
Abdul Mui’zz adds such initiatives by the private sector will reduce dependence on the government and therefore will have a limited impact on the government’s fiscal position.
Likewise, Socio-economic Research Centre economist and executive director Lee Heng Guie says inflation is expected to increase to between 2.8% and 3.5% this year.
Similarly, Lee says price controls and subsidies will be the heavyweights in determining much this year, but there are also other things like the expansion of the service taxes, global commodity prices, geopolitical uncertainties and climatic conditions to factor in.
“The logistics and shipping disruptions at the Red Sea already caused freight rates to skyrocket, increasing transport costs and the cost of doing business, thus threatening consumer goods prices.
“A prolonged conflict with shipping costs staying high throughout 2024 could add to higher global inflation. Plus, extreme climate change could hamper the production of commodities and food,” he adds.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid is a little more optimistic, stating the inflation rate of 2.7% sounds just right for 2024.
Cash transfer programmes
He says while the inflation rate is likely to stay elevated, for the people, the cash transfer programmes will help.
“Sumbangan Tunai Ramah and Sumbangan Asas Rahmah are supposed to minimise the impact, as they will increase the disposable income among the low-income group,” he says.
He cautions, however, that the government needs to beef up its law enforcement on unscrupulous entities that might see this as a way to cheat.
“The government needs to beef up its law enforcement on business malpractices that could take advantage of the current situation by raising their prices excessively,” he says.
On expectations of Malaysia’s economic and financial developments in the fourth quarter of last year that will be announced on Feb 16, 2024, he says the gross domestic product (GDP) could very well register at 3.4% for that quarter, and 3.8% for the full year.
“Weak external demand is the primary reason for the sub-par growth in the final quarter of 2023,” he says.
Lee adds that he expects the final GDP for 2023 will be slightly higher at 3.9%%, taking into account better December data, especially for services, supported by higher tourist arrivals.
Better services exports
Abdul Mui’zz says the GDP will be close to its estimate of 3.4%, and any surprises may come from better services exports and stronger real spending.
“On the other hand, we will not be surprised if there will be a larger drag from external trade, given the smaller surplus in the trade of goods and lower manufacturing output in December 2023.”
Meanwhile, on a global basis, the International Monetary Fund (IMF) says in its recent World Economic Outlook report that inflation is falling faster than expected in most regions in the midst of unwinding supply-side issues and restrictive monetary policies.
“Global headline inflation is expected to fall to 5.8% in 2024 and to 4.4% in 2025, with the 2025 forecast revised down,” the report states.
The IMF adds that policymakers’ near-term challenge is to successfully manage the final descent of inflation to target, calibrating monetary policy in response to underlying inflation dynamics and adjusting to a less restrictive stance.
Lee agrees, stating that while global headline inflation has come down, it has taken a longer time because of the stickiness in service inflation.
“Major central banks are still keeping vigilance on inflation risk, and hence inclined to keep interest rates higher for longer.
“Any rate cut expected down the road will not be as aggressive and in a bigger magnitude as the rate hikes,” he says.