Saturday January 26, 2013
Higher inflation expected; Economists peg CPI at between 2.5% and 3% this year
By CECILIA KOK
WITH the spillover effects of the newly-launched minimum wage policy seen kicking in, and commodity and energy prices expected to go higher, inflation in Malaysia can only be expected pick up again in the coming months.
Economists have pegged their estimates for the consumer price index (CPI), the main gauge of inflation, to grow between 2.5% and 3% for 2013. This compares with a CPI growth of 1.6% last year, after easing substantially from a CPI growth of 3.2% in 2011.
The estimates of private-sector economists thus far seem to be in line with the expectations of the country's central bank, the institution that has been closely monitoring the evolving economic developments in the country, including inflationary pressure.
According to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz, inflation in 2013 would pick up slightly due to high commodity and energy prices. She said last month that the country's CPI growth for 2013 would, nevertheless, be expected to remain below 3%.
Malaysia's inflation has been relatively low throughout 2012, thanks to steady food and fuel prices. Even the December inflation data, which was released over the week, unexpectedly showed continued easing trend, with CPI for the month in review edging lower to 1.2% from 1.3% in November.
But the country's inflation cycle is widely expected to have reached the trough in December.
“The benign (inflation) environment in 2012 will change in 2013,” CIMB Group Holdings Bhd chief economist Lee Heng Guie argues.
In his recent report, he states the potential resumption of subsidy rationalisation, the spillover effects from minimum wages, and higher global commodity prices as among the main risks that could spur inflation in the country in 2013.
Maybank Investment Bank Bhd's (MIB) economists, led by Suhaimi Ilias, concurs, stating in their report: “The narrative behind our inflation expectation for 2013 remains the same, that is, the cost-push impact from policy factors such as the implementation of minimum wage and the resumption of subsidy rationalisation programme, especially affecting fuel cost, gas prices and electricity tariffs.”
Among the basket of goods and services used to calculate Malaysia's CPI, food and non-alcoholic beverages; housing, water, electricity, gas and other fuels; as well as transport are the main components, accounting for almost 68% of the total CPI.
According to CIMB's Lee, food prices this year are likely to increase as a result of global commodity price shocks. He points out that the US Department of Agriculture had earlier said the impact of the drought in the Midwest on the prices of corn, soybeans and other field crops would likely materialise in 2013, and the price inflation of most animal-based food products would likely remain strong due to higher feed prices.
“Apart from that, unresolved geopolitical tension in the Middle East and weather-inflicted supply disruptions domestically may add to price pressure,” Lee says, adding that he expects fuel subsidy rationalisation to resume after the country's 13th General Election (GE13), which must be held latest by June 27.
Many economists share the view that the fuel subsidy rationalisation programme, which would result in higher pump prices for automobiles, would happen post GE13.
Among them is Alliance Research economist Manokaran Mottain. He says in his report that “potential subsidy cuts post-GE13 could likely pressure a reversal in price pressure in the second half of the year.”
Manokaran also believes that a recovery in demand, led both by domestic consumers and external markets, in the later part of this year would drive inflation higher.
According to MIB's economists, the expected adjustments in fuel, gas and electricity subsidies will likely be spaced out between mid-2013 and end-2013, “rather than being done altogether at one shot”.
Most likely, they say, gas price recalibration will come first; and this will then be followed by changes in fuel prices and a review in electricity tariffs.
“Understandably, politics is a factor to be considered; but the current environment does present a timely opportunity to institute subsidy reforms,” an economist with a local bank tells StarBizWeek.
“The country's economy is growing at a healthy pace and inflation rate remains relatively low and manageable. These give room for policymakers to resume the subsidy rationalisation programme, which would otherwise be difficult to implement in a high-inflation and volatile economic environment,” he explains.
“Subsidy reforms, as long as they are carried out in phases, will unlikely cause major disruptions to the economy,” he adds.
Stable interest rates
While inflation is expected to build up gradually this year after touching its trough levels in recent months, interest rates in the country are expected to remain steady through the year.
“Despite anticipation of higher inflation in 2013, it will likely remain manageable and unlikely to pose a threat to the economy. As a whole, the central bank, in our view, will likely keep its Overnight Policy Rate (OPR) unchanged at 3% in 2013, after maintaining it at the same level in 2012,” RHB Research Institute Sdn Bhd economist Peck Boon Soon says in his report.
Manokaran concurs, saying, “Given its low level of inflation risks to recovery, we reckon the central bank would have more room to keep the OPR at accommodative levels. Consequently, we maintain our view that the OPR will likely remain unchanged at 3% in 2013, ensuring an accommodative onetary policy stance and price stability in the domestic economy.”