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SOARING food prices have been dominating the headlines in recent weeks.

Prices of fresh produce such as green vegetables have reportedly surged more than 200% while some staples, including chicken and eggs, are also costlier.

Already struggling from shutdowns because of the Covid-19 pandemic, the masses are feeling the effects of price inflation on their pockets, especially as the economy is still in the early stages of a recovery.

Traditional coffee shops and mamak restaurants have signaled impending price increases, further prompting some lawmakers to raise the issue of soaring prices in parliament last week.

Putrajaya appears to be taking some measures to address the issue.

The Ministry of Agriculture and Food Industries (MAFI) has talked about providing basic food industry players with subsidies so that consumers will "enjoy the appropriate price level" for goods.

The Ministry of Domestic Trade and Consumer Affairs also has more than 1,000 officers monitoring the prices of 480 items in 1,500 premises nationwide daily. To be fair, price increases have become a global issue, with even consumer foods giants Unilever plc and Nestl SA warning of price increases next year.

Economists attribute the inflationary pressure to a myriad of factors, such as supply chain bottlenecks, soaring commodity prices, the global energy crunch and labor shortages as a result of the pandemic. Malaysia has not been spared.

"Supply chains have faced intermittent disruptions since the start of the pandemic, with mobility restrictions amid Covid-19 resurgence leading to a halt in production. Given how supply chains are also more interlinked, that has led to domestic costs being affected by external shocks as well," says Standard Chartered Asia economist Johnathan Koh.

As for domestic food prices, UOB Global Economics and Market Research senior economist Julia Goh says it is partly because of seasonal effects and worker shortages.

Given significant price increases, headline inflation is expected to trend up in the coming months. Goh estimates it will come in above 3%, from 2.9% in October, while core inflation will also rise in tandem with headline inflation, between 1% and 1.5%.

Koh believes the immediate impact of the price increases will probably be less on core inflation, as prices of volatile food items, such as meat, fish and vegetables, are excluded from the calculation. But he cautions against "second-round effects".

"As the labor market improves with the reopening and recovery of the economy, workers may demand higher wages to cope with rising inflation. This could then lead to a more broad-based increase in prices of goods and services, resulting in a rise in core inflation," he comments.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid believes the full-year inflation rate could exceed the projected 2% to 3%, given that the supply bottleneck is likely to continue in the foreseeable future.

Mohd Afzanizam says: "Typically, prices may not come down once they go up. Such a phenomenon has been aptly described under the New Keynesian [model], whereby prices are said to be sticky downwards, given that sellers may not have the incentive to cut their prices, especially when consumers are willing to pay at any price level.

"We are also already facing some structural issues in respect to key products such as food, whereby our dependence on foreign sources has been increasingly higher. This is reflected in the trade deficits in the agro-food sector, which has ballooned to RM21.8 billion in 2020 from a deficit of RM17.4 billion in 2019.

"For the first 10 months of 2021, the trade deficit in agro-food has already reached RM20.7 billion. So, we can expect inflation to likely be the main issue going into 2022."

Malaysia does import a massive amount of its food. In 2020, its food import bill hit a staggering RM55.5 billion. How long this period of significant price hikes will last is a question that economists find hard to answer.

UOB's Goh believes any cost-push pressures are likely to be managed through non-monetary measures such as fuel subsidies, price caps on essential items and government efforts to increase food supplies.

"However, the extent of demand-pull price pressures should not be underestimated, given that the Malaysian Employers Federation projected a more than 4% increase in salaries and bonuses for 2022. The economic recovery and improving labour market could also lead to wider cost pass-through," she adds.

Besides that, Goh stresses, any further ringgit weakness will intensify import cost pressures. At the time of writing, the ringgit was trading at 4.21 to the greenback.

Standard Chartered's Koh points out that a significant portion of the price hikes will depend on the pandemic, which is still a fluid situation. What most are assuming at this point is that supply disruptions will ease into mid-2022 as global economies continue to reopen.

He says: "This is barring the risk of a resurgence in the Covid-19 virus that requires the re-imposition of mobility restrictions that could then again lead to disruptions in the supply chain. For now, with regard to Omicron, it seems that there is an emerging view among scientists that existing Covid-19 vaccines still work against it in protecting people against severe illness."

What does this mean for the 2022 inflation outlook?

Goh's current headline inflation forecast is 2.5% for 2022, but she is looking to revise the inflation projection for next year upwards.

Koh has a lower forecast of 2%, as he sees supply side constraints easing through 2022 amid economic reopening.

"[The] high base in 2021 [will] weigh on 2022 inflation too. We forecast core inflation at 1.4% in 2022 versus 0.7% in 2021 amid economic and labour market recovery," he says.

Bank Islam's Mohd Afzanizam believes inflation will be a main issue in 2022 for Malaysia, given how the supply bottleneck will take some time to be resolved while the "stickiness" of prices indicates that addressing the supply-demand imbalances will not guarantee a reduction in prices.

"Perhaps, the government [will] need to look at the supply chain more thoroughly by enforcing the relevant Act. At the moment, it seems that we are clueless as to the cause, as businesses would typically blame the other players in the supply chain. Therefore, we believe the inflation rate will stay elevated next year," he says.

The US is preparing to hike rates and reduce the pace of its asset purchase programme and, with inflation fast rising in the US, many think the Federal Reserve will speed up its tightening policy in a bid to tame inflation.

When the US raises interest rates, economies around the world will follow suit. Many economists anticipate that Bank Negara Malaysia will start to raise rates next year, with some predicting that it will happen in the third quarter.

At this point, Goh says, a rise in interest rates can only help tame demand-pull inflation, not cost-push price pressures.

"It could do more harm if the economic recovery is nascent while pandemic risks continue to linger. As such, our base case is for the overnight policy rate (OPR) to stay flat in 1H2022 and one 25bps rate hike in 3Q2022.

"Nevertheless, if the economic recovery turns out to be more robust and stable in the coming months amid signs of wider pass-through of higher costs to consumers, then Bank Negara could bring forward the rate normalization," she says.

Questions 1) Name an oligopoly model that depicts a similar situation among firms and in the context of the oligopoly model , explain the price and output determination strategy among firms in the model.