Manufacturers are said to be reducing prices to remain competitive due to deflation in China and the trade policies from President-elect Donald Trump.
PETALING JAYA: A lower producer price index (PPI) is expected to persist, thus supporting low inflation levels.
The PPI measures price changes of goods at the producer level.
According to a paper titled Low inflation as a strategy to withstand global trade uncertainties by AmInvestment Bank Research (AmInvest Research), Malaysia’s PPI dropped 2.4% year-on-year in October this year, a sharper decline compared with the 2.1% drop in September.
This made it the second consecutive month of deflation and the steepest pace since June 2023.
The report said it was driven by a 2.6% decline year-on-year in manufacturing-sector prices, consistent with the trend of China’s ongoing producer deflation and easing global supply chain pressures.
Manufacturers are said to be reducing prices to remain competitive due to deflation in China and the incoming trade policies from President-elect Donald Trump.
This is especially the case as the United States and China are among major export destinations for Malaysia, accounting for 11.3% and 13.5%, respectively, of exports.
“This trend may lead to squeezed profit margins for producers. If manufacturers cannot cut costs to offset the impact of higher tariffs, this could result in increased inflation and a subsequent decrease in consumer spending, posing risks to economic growth,” AmInvest Research said.
Furthermore, Trump’s promise to impose new tariffs have resulted in businesses adopting measures such as accelerating shipments before tariffs are imposed, which has driven up trade activity.
“China’s exports expanded for the eighth consecutive month in November, while Malaysia’s exports are anticipated to strengthen further in the coming months after rebounding by 1.5% year-on-year in October. This scenario, however, is partly dependent upon the performance of Malaysia’s electrical and electronics (E&E) sector,” it noted.
In the first 10 months of 2024, Malaysia’s exports increased by 4.8% year-on-year, increasing to RM1.24 trillion from RM1.19 trillion in the same period last year.
“This growth was primarily driven by the E&E sector, which accounted for 39.5% of Malaysia’s total exports. There were also notable contributions from other major products, such as palm oil, chemical products and machinery, as well as double-digit growth in rubber and rubber glove exports,” AmInvest Research said.
The research house said the declining PPI in Malaysia explains the low and stable inflation here.
While the PPI tracks production costs and the consumer price index (CPI) measures consumer prices, analysis showed that PPI shocks typically affect the CPI within three months.
“With subdued global demand and rising trade barriers, manufacturers are under increasing pressure to further reduce prices, which could amplify economic challenges,” AmInvest Research noted.
