Inflation – should we start worrying?

LAST week, a report from World Bank warned of the re-emergence of inflationary pressures in Asian economies that could complicate the region’s prevailing policy stances to support growth.

Consumer prices have been on the rise in the region’s economies since the beginning of the year, as economic activity starts picking up across the region. For instance, in the two largest Asian economies – China and India – inflation have already accelerated over the last two months.

In China, consumer price index in May rose 3.1% from a year earlier, compared with April’s 2.8% rate, while property prices rose 12.4% from a year earlier.

This has prompted World Bank to urge China to raise interest rates to curb the country’s rising inflationary pressure and soaring property prices.

In India, on the other hand, inflation hit a two-year high last month, with wholesale price index rising 10.16% from a year earlier, compared with the 9.59% rate in April, as higher food and fuel prices continued to drive overall costs up.

Local key government officers over the week said India’s inflation rate had reached “very uncomfortable” levels and that the central bank had to step in to curb the pressure.

Singapore’s consumer prices jumped 3.2% in April, and are expected to rise around 2.7% in May, while Indonesia’s inflation rate has already exceeded the 4% mark since last month.

In Malaysia, the numbers have yet to show any worrying sign, as the country’s inflation rate seems to be well on target.

Figures from the Department of Statistics show that consumer price index (CPI) for May rose at a tame rate of 1.6% from a year ago, almost matching the April’s rise of 1.5%.

Food prices remained the major contributor to the country’s inflationary pressure, rising 2.5% compared with 2.2% in the preceding month.

Most economists expect consumer prices in Malaysia to move higher in the second half of the year, albeit moderately, as the low-base effects fade and as domestic demand continues to strengthen on improved economic prospects.

No doubt, with subsidy rationalisation plan on the cards, inflationary pressures could accelerate further in the future. But with the Government reiterating its position of not rushing in to implement changes to the subsidy scheme, economists say the inflationary pressures in the country could still be kept at a restrained level for the rest of this year.

That is not to deny the fact that consumers will still be challenged by the rising cost of living in the country.

Malaysia’s CPI is based on a basket of goods and services, ranging from food and beverage, utilities and fuel, clothing and footwear to transport and communications. This means the actual prices paid by consumers for certain type of goods or services are actually much higher than that indicated by the CPI.

(Right)A customer shops at a wet market in Klang. Most economists expect consumer prices to move higher in the second half of the year. – AP

As it is, inflation expectations in the country are already building up. Such expectations tend to result in employees demanding for higher wages and businesses to potentially raise prices further to protect their margins.

In an annual survey conducted by international recruitment and human resource services agency Randstad, it was found that around 47% of Malaysian employees are expecting a pay rise of 5% to 10% this year.

On the other hand, the average salary increases this year, based on a survey by the human-resource specialist Kelly Services, is expected to range from only 4% to 5%.

“Many businesses are already struggling to cope with the rising cost of production that’s eating into their profit margins,” an economist with a local investment bank explains.

For instance, figures from the Department of Statistics showed that producer price index had remained on the up trend for the sixth straight month in May, as higher prices of domestic inputs continued to exert pressure on production costs.

“Eventually, businesses will have to pass on their higher costs to consumers – which would translate into higher prices of goods and services – to bolster their revenues and profit margins,” the economist explains.

Nevertheless, for the immediate term, the latest CPI numbers do suggest that there is less pressure for Bank Negara to raise interest rates in the next Monetary Policy Committee meeting in July.

The central bank had repeatedly indicated the importance of maintaining an accommodative interest rate regime to support the country’s economic growth.

Bank Negara has so far raised the country’s benchmark overnight policy rate (OPR) twice as part of the normalisation process this year. In fact, it became the first in the region to do so in March when it raised the OPR by 25 basis points from the record low of 2%.

Last month, Bank Negara revised the OPR again by another 25 basis points to the present level of 2.5%.

Some economists are betting on the central bank to pause its rate normalisation process for a while as a result of the mounting uncertainties arising from the 16-nation euro zone that are currently weighing on market sentiment and dampening global economic outlook.

Leading indicators seem to suggest that Malaysia’s gross domestic product growth have peaked in the first quarter of the year, after a double-digit expansion of 10.1% year-on-year.

The subsequent quarters are expected to record slower growth rates due to the waning effects of the low-base factor and economic stimulus measures as well as slower exports growth.

By CECILIA KOK
cecilia_kok@thestar.com.my