Malaysia: Inflation to ease towards year-end

PETALING JAYA: Economists say Malaysia’s inflation will ease towards year-end in tandem with the deceleration of the global economy after prices rose the fastest in more than a year.

Inflation in July jumped 4.4%, the highest since April 2021, said the Statistics Department.

This was largely due to the low inflation base last year.

Speaking with StarBiz, Sunway University economics professor Yeah Kim Leng said inflation in Malaysia is expected to ease towards year-end but it will remain higher than last year.

Having the same opinion, Malaysia University of Science and Technology economics professor Geoffrey Williams said price rises are expected to moderate over the rest of the year, as internationally, prices in the supply chain are falling.

“Although prices are increasing across more categories, there are some indicators that we may be at or near peak inflation,” Williams said when commenting on high inflation numbers for July 2022.

On the other hand, Centre for Market Education chief executive Carmelo Ferlito said an economic contraction may happen, bringing in some deflationary easing.

With the rising inflation, Yeah believes that this year’s consumer price index (CPI) will land above expectations of between 2.5% and 3%.

To a question regarding the possibility of a potential hike in interest rates by the central bank owing to the higher inflation, Yeah said there will be a need to raise interest rates aggressively.

He added that the normalisation of the overnight policy rate (OPR) to pre-pandemic levels of between 3.25% and 3.5% can be expected depending how high inflation will rise and whether it is persistent.

Meanwhile, Carmelo said the OPR is likely to trend higher, although it may not be enough without a sound plan for long-term government spending cuts.

However, Williams said that raising interest rates cannot bring prices down.

“Although there will be calls or expectation for hikes in OPR, these will not affect future inflationary pressures which are actually easing as supply-side and supply-chain factors recover,” Williams said.

“This is seen in many prices indicators across the world and in Malaysia’s producer prices which fell in July compared to June,” he added.

Meanwhile, Williams thinks if high prices lead to higher interest rates, it will have a knock-on effect on credit costs for consumers and businesses, which cuts spending and investment, and consequently slows growth.

With the rising inflation, Yeah and Carmelo think there will be pressure for wage increases.

However, Williams noted that wages in Malaysia do not rise in line with prices, as they are determined by many other factors.

On the unemployment trend, the economists expect it to dip further, in line with job creation.

“We may not see it dipping below pre-pandemic levels, likely remain at 3.8% or 3.9%,” Yeah said.

Referring to the unemployment trend, Carmelo said: “It may keep on recovering in the short run, but inflation and the international scenario may bring new tensions and therefore, new unemployment.”

Meanwhile, Williams said: “We will not see higher unemployment, just more people taking more poorly paid jobs and persistent underemployment.”

Core inflation and inflation without fuel registered increases of 3.4% and 4.2%, respectively in July 2022 as compared to the same month of the preceding year.

On a monthly basis, inflation increased 0.4% as compared to June.

For the January to July period, inflation increased 2.8% as compared to the same period last year..