PETALING JAYA: Aside from the unveiling of Malaysia’s gross domestic product (GDP) growth last Friday, Bank Negara also projected headline inflation to range from 1.5% to 2.5% for the whole of 2024, with a slight tick upward to between 2% and 3.5% for next year.
Ahead of the Consumer Price Index (CPI) figures for October to be released later this week by the Statistics Department, the central bank revealed that although the prediction is split between a spate of upside and downside factors, the short-term view is still tending north, for now.
“Going forward, the outlook for inflation will depend on the implementation of further domestic policy measures on subsidies and price controls, as well as global commodity prices, disruptions to global supply conditions and financial market developments,” it said in a statement published last week.
At the same time, it listed softer commodity prices from weaker growth in major economies and slower demand conditions, due to a weaker-than-expected external scenario, as possible reasons that inflation could slide lower.
Bank Negara reported that for the third quarter ended Sept 30, 2024 (3Q24), headline inflation was stable at 1.9%, continuing the trend from 2Q24, with the year-to-date rate averaging at 1.8%.
Other economic experts are basically sanguine on the CPI front, with senior Asean economist at OCBC, Lavanya Venkateswaran, forecasting headline CPI to average 1.9% year-on-year (y-o-y) in 2024, as she observed that inflationary pressures have been benign throughout this year, exemplified by food and fuel prices being relatively well-behaved.
Not surprisingly though, despite having her baseline forecast for headline inflation to average 2.1% y-o-y in 2025, she conceded there are inflationary policies in the pipeline, including the raising of RON95 prices from mid-2025, the 13.3% increase in minimum wages from February 2025 and 7% to 15% increase in civil servant salaries effective December 2024.
“Specifically, if the RON95 rationalisation is implemented as outlined in Budget 2025, we estimate that retail prices could rise by 20% to 25% from July 2025, pushing our estimate of average inflation higher to 2.6% to 2.8% y-o-y for next year,” said Lavanya.
She told StarBiz that the caveat, however, is that the mechanism of implementation is unclear, given that the subsidy removal will be targeted to a certain section of consumers.
Like Lavanya, economist and chief executive at the Centre for Market Education, Carmelo Ferlito, agreed that inflation will remain at around 2%, or even slightly lower, for the rest of the year, pointing out that there are no indications of an immediate trend inversion on the horizon.
Always keen to outline what he said is the real cause of inflation, which he emphasised to be a disproportionate increase to the money supply that resulted in the fall of purchasing power, Ferlito said CPI figures for next year would significantly depend on the details of the RON95 targeted subsidy rationalisation.
Explaining that an increase in prices does not equate to inflation, he said the RON95 targeted subsidy implementation will have an inflationary effect if the proposed cash aids are financed with an increase in the supply of money.
“A generalised and persistent increase in prices is a consequence of inflation.
“If some prices increase, but the amount of money in circulation does not change, then there will be less money spent on other items, depending on relative prices and elasticity,” he said.
The situation will become inflationary if the government embarks on a process of money creation and, in particular, if the amount of money is allowed to grow faster than the GDP, added Ferlito.
In line with the mini consensus, Socio-Economic Research Centre executive director Lee Heng Guie also opined the headline inflation to remain stable at 1.8% y-o-y for October and between 1.8% and 1.9% in November and December, aided by stable food prices, as well as moderating transportation, information and communication prices.
He reckoned these factors will bring the cumulative price increase to 1.9% in 2024.
Concurrently, Lee said the balance of risk to inflation outlook in 2025 are also dependent on several factors.
“(These include) spillovers from subsidies rationalisation and price controls, higher minimum wages and average salary increment of between 7% and 15% for civil servants, volatile global commodity prices and higher inputs cost amid the ongoing geopolitical risks, weather disruptions and policy changes under the incoming second US presidency term of Donald Trump,” he said.
Of interest, Coface Asia Pacific economist Nouri Chatillon told StarBiz that on top of the RON95 and wage increase issues, the extension of the sales and services tax will also contribute to inflation next year, coupled with the fact that Bank Negara is unlikely to tighten monetary policy again any time soon.
“We expect a status quo throughout next year, which will not help to bring inflation down.
“We therefore anticipate inflation to accelerate to around 2.7% in 2025,” the economist said.
