The Star Malaysia - StarBiz

Inflation down but layman still feeling the pinch


ONE of the biggest challenges for the new government is dealing with rising inflation, which has already been a contender for topic of the year, next to hikes in interest rates across the world.

Incidental­ly, Malaysia’s inflation rate for October eased slightly to 4% compared with the 4.5% recorded in September, although the Statistics Department said the rate still surpassed the nation’s average inflation of 2% for the period of January 2011 to October 2022.

On a positive note, the latest guidance provided by Bank Negara is estimating headline inflation to have peaked in the third quarter of 2022 and is expecting it to moderate thereafter. According to the Statistics Department, year-to-date inflation – the consumer price index or CPI – peaked in August 2022, where headline inflation increased by 4.7%.

However, tell that to the man on the street and he may not believe it, as he is still feeling the effects of elevated prices, with many still uneasy about investing especially in big-ticket items.

The central bank did warn that core inflation would remain elevated due to both demand and cost pressures, and even new Prime Minister Datuk Seri Anwar Ibrahim has mentioned that his immediate priority is to address the cost of living and rising prices of goods and services that are burdening Malaysians.

Economists by and large see the inflationa­ry pressures to be staying put moving into 2023, with one of the drivers ironically being consumer demand as the local economy continues on its path to recovery, albeit being focused on smaller-ticket products.

According to Eve Barre, AsiaPacifi­c economist at credit insurance firm Coface Services South Asia Pacific Pte Ltd, worldwide food and crude oil prices are likely to remain elevated in 2023, while in the local context, the proposed plan by the previous government to implement a targeted fuel subsidy scheme which would entail only limiting fuel subsidies to the poor, could have a notable impact.

Barre tells Starbizwee­k, “With transport and utilities representi­ng a great share of Malaysian household spending, they will undoubtedl­y feel the hit if this plan is carried out.”

As such, she expects Anwar’s prospectiv­e government to delay plans to implement any withdrawal­s of fuel subsidies, at least in 2023, which would be in line with his goal of tackling the problem of elevated prices.

She explains that for Malaysia, rising inflation in 2022 has been mainly due to the increasing prices of food items. She notes, however, that the CPI expanded at a slower pace in the past two months, thanks to a softening in food inflation.

As the Statistics Department has revealed that food prices increased by 7.1% in October against the 6.8% in September, Barre adds, “Core inflation – which excludes volatile items of fresh food as well as administer­ed prices of goods by the government – keeps increasing. It shows that high raw material prices are passing through a broader-based range of goods and services, limiting the effect of slower food prices on the overall inflation rate.”

Barre projects that inflation should decelerate in 2023 amid tighter monetary and financial conditions, but feels it is worth noting that the rate of inflation is likely to stay higher than its average over the past 10 years, echoing the findings of the Statistics Department mentioned above.

Executive director at Socio Economic Research Centre, Lee Heng Guie, meanwhile says that inflation risk and the higher cost of living will remain to crimp consumer spending.

He says global inflationa­ry pressures are impacting the local increase in prices via imported inflation. Imported inflation is the increase in the prices of imported goods and materials that would in turn lead to a hike in domestic production costs, which could be set off by foreign price increases, or by depreciati­on of a country’s exchange rate.

“Besides imported inflation, prices locally are also driven upwards by the anticipate­d change in domestic policy with regards to the implementa­tion of targeted fuel subsidies, the implementa­tion of the power tariff via the imbalance cost pass-through or ICPT mechanism, price ceiling reviews and the impact of the weak ringgit,” Lee tells Starbizwee­k.

With core inflation having moved north in recent months to an all-time high of 4.1% in October, Lee concurs with Barre that there is a broadening of price pressures, adding that this was due to strong consumer spending and the strengthen­ing Malaysian economic recovery.

He points out that while headline inflation has been moderating to 4% in October, the underlying inflationa­ry trend is expected to stay above 4% in the months ahead.

“We estimate headline inflation to stay in the range of between 2.8% and 3.3% in 2023, assuming global inflationa­ry pressures persist and the new government decides to implement the targeted fuel subsidy scheme,” says Lee.

Meanwhile, restaurant operator Grace Wu tells Starbizwee­k about some common problems that have beset her and many of her counterpar­ts for more than two years.

“Firstly, we have had to cope with the various movement control orders of 2020 and 2021. Then, while we are grateful for the reopening of the economy since late last year as business has grown, we have been impacted by the price hikes of various raw materials that impacted cooking ingredient­s such as cooking oil, flour, chicken and eggs,” she says.

Wu understand­s the rationale behind price ceilings introduced by the government to mitigate the pain felt by consumers, but agrees with the idea that a free market may be the best long-term solution.

She adds, “There is practicali­ty in price ceilings for the short-term survival of many businesses. For us, however, we have chosen not to pass the cost increase to consumers but have absorbed it instead because we only began operating three years ago and needed to garner more customers.”

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