Saturday March 17, 2012

Countries in the region are facing issues of surging food and raw material prices


HOUSEWIFE Aminah, 45, finds that she has to fork out at least RM150 more on her weekly grocery shopping compared with more than a year ago.

It's not that she has been buying anything superfluous for her family of four, nor has there been any significant change to the family's shopping list over this period of time, but like any other regular household in Malaysia, rising cost pressures have become a fact of life.

“We feel the pinch, even though the increase in prices did not happen overnight, but steadily over a period of time,” Aminah shares.

“Just look at the difference in the amount that I have to pay for my groceries now and then. It may not be much to some people, but it definitely creates a dent to our pockets; and our family's grocery bill is just one, what about other bills and expenses that we have to pay?” she laments.

Indeed, rising cost of living has been a major challenge to many Malaysians in recent years. Prices of goods and services in the country have been increasing steadily over a period of time, as evident in trend of its consumer price index (CPI), the main gauge of inflation.

But the problem is not unique to Malaysia. Most Asian countries have been slapped with the same kind of challenge, no thanks to the surging prices of mineral and agricultural commodities as well as raw materials and food.

The lucky thing for the Malaysian consumers, though, is the subsidies given for several essential goods such as rice, sugar, petrol, gas and electricity tariffs, have helped alleviate inflationary pressure so that the impact on them has not been as painful as it has been for their regional counterparts.

Headline inflation numbers across Asia may have cooled off in recent months, but there are still dangers lurking around the corner.

For one thing, crude oil prices are already advancing. This is mainly attributable to the ongoing geopolitical tension in the Middle East, the abundance of liquidity in the financial markets that have started flowing back into the commodity again, and the strong demand from Asia, whose economy is still growing at a relatively healthy pace compared with the rest of the world.

“The threat of higher inflation arising from gains in food and commodity prices cannot be ignored,” CIMB Research's chief economist Lee Heng Guie says in his report.

“Oil price's buoyancy may fire up inflation risks, putting policymakers in a bind as they may be forced to take action to curb inflation while ensuring economic growth does not slow down too much,” he adds.

In a statement issued after its recent Monetary Policy Committee meeting, Bank Negara conceded that high global commodity prices were posing a risk to inflation in Malaysia.

“Upside risks to inflation could emerge arising from the risk of supply disruptions and the possible financialisation in commodity markets, which would result in higher energy and commodity prices,” the central bank said, adding that it was closely monitoring the situation, while playing its role in regularly adjusting the country's monetary policy to encourage economic growth.

Despite the apparent risks, Bank Negara's latest assessment still point to a moderate headline inflation for Malaysia this year.

The country's CPI growth for February, which will be released in the week ahead, is expected to show further signs of deceleration, after having decelerated to +2.7% year-on-year (y-o-y) from +3% y-o-y in December and +3.3% y-o-y in November.

Price pressures

Malaysia's CPI deceleration since late last year has been in line with regional trend. But the trend, to some economists, could be more than what meets the eye.

According to economists at the Hongkong and Shanghai Banking Corp (HSBC), inflation across the region could turn out to be a bigger risk than what the markets have expected.

“Cyclical cooling of headline readings should not be mistaken for an absence of fundamental price pressures,” economists at the global banking group say in a report.

They explain that while inflation may be cooling off for cyclical reasons, structurally, price pressures in Asia will keep pushing up. This is attributable to the fact that economies in the region are also changing structurally.

They noted, for instance, there are increasing efforts in the region to shift from being exports-oriented to more domestic demand driven. Tight labour markets in most parts of the region is also putting pressure on wages to rise, and there are concerns that the huge investment spending has not been really effective in raising the productive potential of the region.

HSBC is of the view that once economic growth in Asia picks up again, surging inflation will return even more quickly to the region.

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