PETALING JAYA: The country’s inflation rate will be manageable and kept stable in 2024, underpinned by lower oil prices and the re-establishment of the balance between gross domestic product (GDP) growth and money supply, say economists.
The optimistic outlook pertaining to the rising prices for goods and services came on the back of encouraging data from the Statistics Department, which revealed that the headline inflation in the country had stayed at 1.5% for December 2023, and at 2.5% on average for the whole of last year.
The moderating increase in headline inflation was led by a lower rise of 2.3% in food and non-alcoholic beverages (F&NAB) in the final month of 2023, as compared with 2.6% in the previous month, which is significant as F&NAB contributes to 29.5% of total consumer price index (CPI) weightage.
Of note, inflation for restaurants and hotels had slowed to 3.7% in December from 4.3% in the preceding month and food away from home eased to 3.4% compared to November’s 3.9%, as food at home also edged lower to 1.3% against the 1.4% seen in November.
While concurring that Malaysia was on the right path in terms of managing inflationary pressures, economists are of the view that varying reasons have also been contributing factors to the gradual lowering.
Economics expert at the Malaysian University of Science and Technology (MUST) Geoffrey Williams opined that the current trends in CPI were exactly as expected and as he had forecast 12 months ago.
“The rise in prices is slowing across most categories and continues to fall for communications services. The rise in prices for food and restaurants is also slowing, except for meat,” he observed.
Williams noted that the main drivers have been lower oil prices, better competitive conditions as supply opens up and stronger consumer awareness which is holding back retailers from passing on costs too much.
In line with the data, he is expecting low and stable inflation for 2024, barring any major shocks to supply-chains or the global economy.
On the other hand, he acknowledged that despite headline inflation being below historical averages, Malaysians can expect to see limited impact from subsidies rationalisation in 2024.
He said: “Core inflation is elevated, but slowing gradually. This means that we have a stable environment and no expectations of higher interest rates.”
Similarly, chief executive at the Centre for Market Education Carmelo Ferlito does not foresee inflation accelerating any time soon, unless the government decides to increase public spending without additional revenue support.
Holding on to the fact that inflation in its purest form is an effect of money supply increase, Ferlito’s calculations – derived from the Statistics Department and Bank Negara data – showed that the inflation experienced in Malaysia over the past several years was the result of an acceleration in the quantity of money, which grew at a much faster pace than its output and GDP.
“The re-establishment of a balance between money supply growth and GDP growth has underpinned the deceleration of inflation.
“Therefore, what we are experiencing now is not a signal of slower demand, as inflation is basically a monetary phenomenon,” he told StarBiz.
On a cautionary note, he said increasing tensions in the Middle East could be a trigger for inflation, but not in the way that most would perceive.
He explained that inflation will be triggered again if these conflicts push governments to support war efforts with the creation of money in expansionary fiscal policies, especially if coupled with higher deficit spending.
In what may appear to be counter-intuitive, he commended that the impending subsidy rationalisation would also be beneficial for the country’s CPI outlook in the medium to long term.
Elaborating, Ferlito said subsidies have been covering up what prices would be in normal conditions, creating a situation of addiction to false economic signals that in turn drive bad economic decisions.
Removal of subsidies, he said, was important to expose Malaysians to economic reality and to have business decisions based on real data.
Offering an alternative view, economics professor at Sunway University Yeah Kim Leng is anticipating headline CPI in 2024 to tick up to between 2.5% and 3.5% this year.
“Our forecast uptick and wide range are reflective of uncertainties over global growth, the potential escalation of the armed conflicts in Ukraine and the Middle East and disruption to maritime transport via the Suez Canal,” he said, reflecting Ferlito’s thoughts on geopolitical issues.
Domestically, he stressed that the timing and pace of fuel subsidy rationalisations will also shape inflation trajectory for this year, commenting that the year-end easing inflation of 2023 to below average augurs well for the economy to cope with the shift from blanket to targeted fuel subsidies anticipated in the middle of this year.
Yeah believes the quantum of fuel price adjustment will be a key factor influencing the inflation trajectory, adding that fuel subsidy rationalisation is expected to raise inflation, but household spending will likely be kept steady due to targeted subsidies that transfer spending from high income groups to low income households.
Of interest, he said given the further decline in unemployment on top of nominal wage growth, domestic demand is not expected to weaken substantially despite the relatively low and stable inflation rate.
Separately, chief statistician Datuk Seri Dr Mohd Uzir Mahidin reported that six Malaysian states or territories had recorded increases above the national inflation level of 1.5%; namely Sarawak, Federal Territory of Putrajaya, Perak, Penang, Selangor and Perlis.
Looking outside the country, Mohd Uzir commented that Malaysia’s inflation in Malaysia was lower than the Philippines’ 3.9%, Vietnam’s 3.6%, the 3.6% seen in the US, the Euro Zone’s 2.9% and Indonesia’s 2.6%.
However, he observed that Thailand had experienced a deflation of 0.8%, with China also seeing CPI numbers dropping by 0.3% in December.
