By Sherilyn Goh
The decline in domestic fuel prices have not been able to offset the inflationary pressures of a weaker ringgit and the chained effects of the Goods and Services Tax (GST) implemented since April this year, as seen in August headline inflation which exceeded consensus expectations to come in at 3.1% year-on-year.
While August inflation, as measured by the Consumer Price Index (CPI) moderated 0.2% month-on-month from July’s 3.3% on the back of a decline in domestic pump prices, the food and non-alcoholic beverages segment continued to lead inflationary pressures, ticking up 4.24% in August compared to 3.81% in the previous month, according to data released by the Statistics Department on Sept 23.
As a sizeable amount of food products are imported, MIDF Research is of the view that the higher prices were due to imported inflation caused by a weaker ringgit in August. The ringgit has been trading above RM4.00 per USD since the beginning of August, while having sharply depreciated against the greenback by about 19% since earlier this year.
“Currently, there are higher inflationary pressure coming from imported inflation and upward momentum from GST implementation. However, since Malaysia’s domestic pump price follows the three-month moving average global market prices, domestic inflation could be curbed at a moderate level for the rest of the year,” said the research house.
The August inflation figures had come in slightly above analysts’ expectation, when Standard Chartered Bank Research, among others, forecast CPI in August to ease to 2.9% due to downward adjustment of domestic fuel costs.
Removing pump price from the CPI basket, however, place August inflation at 3.7%, the highest level post global financial crisis believed to be contributed by both a weaker ringgit and the GST implementation, added MIDF Research.
Cumulative CPI for the first eight months in 2015 came in at 1.9%, as compared to the corresponding period last year.
Bank Negara Malaysia governor Zeti Akhtar Aziz had earlier anticipated full-year inflation rate to come within the 2% to 3% range, despite inflationary pressures from a weaker ringgit and implementation of the GST.
Imported inflation to kick in
“Year-to-date, overall CPI trend has largely been influenced by the cost-push pressures following the GST implementation in April 2015, and the easing in pump prices following the adoption of the managed float fuel price system in December 2014 that facilitates the retail cost pass through from global crude oil prices.
“However, in light of the ringgit exchange rate trend that could remain weak for a while before the various external and domestic macro uncertainties settle, the risk and impact of imported inflation are near term concerns,” cautioned AllianceDBS Research.
The historic annual trends from 1980 to 2012 between the Malaysian Import Price Index and the CPI have a high positive correlation of 0.97, suggesting that overall price pressures adjust and move in tandem in the long run.
“As the quantum of decline in fuel prices may soon fade off but the upward pressure on the prices of other items in building up, the headline index is more likely to edge up going forward before peaking in mid-2016. We maintain our CPI forecast of 2.3% for 2015 and 3.0% for 2016,” said CIMB Research.
This is while another research house, TA Securities maintain their 2.2% inflation forecast. “Our early estimation showed the inflation rate to average at 3% in 2016 following the continuation of GST impact and increasing imported inflation,” forecasted TA Securities.
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