Is Malaysia Entering a High Inflation Cycle?

KUALA LUMPUR (March 25): Global inflationary pressures have risen in the eye of aperfect storm underpinned by supply disruptions, surging energy and commodityprices, and increased demand amid economic reopening.

Back in Malaysia, most economists expect inflation to trend higher this year toreflect the rise in commodity prices and wages, but do not expect inflation toaccelerate rapidly like in the US as domestic fuel subsidies limit the upside.

The Consumer Price Index (CPI) expanded 2.3% year-on-year in January 2022.The Department of Statistics Malaysia is expected to release the February figure onFriday (March 25).

When contacted, Socio-Economic Research Centre (SERC) executive directorLee Heng Guie expects this year's inflation to trend higher in the range of 3% to 3.5%,compared with 2.5% recorded last year to reflect the effect of imported inflation onfood inflation coupled with wage-push inflation as businesses seek to protect theirmargins.

He explained that wage growth is the key driver for inflation. The proposedrising minimum wage rates will ultimately create a labour cost "snowball effect" foremployers, pushing labour costs higher across all positions.

UOB Malaysia senior economist Julia Goh and economist Loke Siew Tingagreed that risks to inflation are still tilted to the upside.

Among the key upside risks are global supply chain disruptions, escalatingcommodity prices, higher wages due to post-pandemic labour shortages and revisednational minimum wage, expiry of government's price control schemes, and potentialsubsidy rationalisation programmes.

"Escalating oil prices are also adding pressure to Malaysia's government fuelsubsidy bill and raising the flag for the government to refocus on the fuel subsidyrationalisation plan in order to manage the burgeoning subsidy bill and rebuild fiscalspace to respond to future challenges. This potential subsidy rationalisationprogramme, alongside expiry of government's price control schemes and post

pandemic labour shortages, are expected to drive inflation higher towards year-end. "Minimum wage hike, coupled with the existing labour shortage issues, will thenfurther accelerate the uptrend in private sector wage growth, affirming the second round effects on inflation in the later part of the year. With all these prevailing risks, we keep our above-consensus inflation forecast of average 3% for this year," both Gohand Loke said in a Feb 24 note.

Meanwhile, MIDF Research economist Abdul Mui'zz Morhalim foresees that theoverall consumer price index (CPI) inflation will be in a range of 2% to 3%, capped bydomestic fuel subsidy.

"With the inflation outlook remaining manageable, we don't foreseehyperinflation risk in Malaysia. While high inflation is a risk to the growth outlook, weexpect inflation will not accelerate strongly in the coming months.

"In addition, the high oil prices will not result in high inflation in energy prices,limited by the cap imposed on domestic fuel prices and diminishing low-base effect,"Abdul Mui'zz told The Edge.

According to him, the source of inflation for this year is expected to come fromstrengthening demand and supply constraints, including rising production costs. "By components, we opine that rising food prices will be among the keycontributors to upward price pressures. Following the broad rise in commodity prices,food prices could increase further. As a net importer of foods, Malaysia will also incurhigher imported inflation, and rising prices of animal feed and fertilisers will alsocontribute to higher food prices. In addition, increase in wages and prolonged supplydisruptions will add to rising production costs, and suppliers may pass on more costincreases to consumers by raising selling prices," he added.

Last month, Bank Negara Malaysia (BNM) governor Tan Sri Nor Shamsiah MohdYunus said the nation is "nowhere near" the risk of very-high inflation because upwardconsumer price pressure had mainly been due to Covid-19-pandemic-driven supply chain disruptions even as demand recovers in tandem with improving economicconditions due to Covid-19 vaccination progress.

Businesses to embrace rising costs and downside risk to economic growthSERC's Lee said businesses need to prepare for rising inflation and interest rates.Against this backdrop, he sees the downrisk of the outlook for Malaysia's economy.

"When inflation goes higher, it will curb consumers' spending and corporationshave to bear higher business costs. If they cannot fully pass down the costs, henceearnings will be affected.

"Globally, people are seeing a risk of high inflation and long periods of inflationand there will be lower (economic) growth, especially in the US. They also worry if theymake a wrong policy could push their economy into recession. In China, its "zero Covid" policy has prompted more stringent lockdowns and it may cause theeconomy to slow down...all this (consequences) will hit Malaysia's export demand,"Lee added.

With all the prevailing risk, Lee said his risk assessment to Malaysia's economytilted to the downside. Currently, SERC has projected a gross domestic product (GDP)growth of 5.2% for 2022.

SERC's forecast is lower than the government's projection of 5.5% to 6.5% underpinned by continued expansion in global demand and higher private-sectorexpenditure, according to BNM.

Considering the latest developments, including the indirect impact broughtfrom Russia's invasion of Ukraine and US's move towards tighter monetary policyincreasing domestic business cost, Lee sees there is a need for the government torelook at the GDP outlook for this year.

Malaysia's economic performance in 2021 showed a recovery momentum withgrowth of 3.1% compared to a contraction of 5.6% in 2020.

Economist expects BNM to raise OPR up to 50 bps in 2022

On the monetary policy outlook, the build-up of domestic inflation pressures togetherwith sustaining growth momentum and more aggressive US Federal Reserve (Fed)monetary policy tightening would justify an interest rate hike by Bank Negara Malaysia(BNM) as early as in the second quarter (2Q) this year, said UOB Malaysia's Goh andLoke.

"A sooner-than-expected rate increase will also help to preserve some roombetween Malaysia's overnight policy rate (OPR) and the US Fed Funds rate, andmaintain exchange rate stability. Thus, we expect the OPR to be raised twice this year.

"Thereafter, a successful transition into an endemic phase and a possibleeasing of geopolitical risks could provide ammunition for further monetary policynormalisation in 3Q22, bringing the OPR to 2.25% by end-2022," they added.

They stated that the Central Bank kept a wait-and-see approach to assess theimpact of Russia-Ukraine conflict and other prevailing risk events on the domesticgrowth and inflation outlook before adjusting its monetary policy stance.

MIDF's Abdul Mui'zz, who is expecting 6% GDP growth this year, foresees BNMraising the OPR by 25bps to 2% in the second half this year (2H2022), bringing themonetary policy to a more normal level on the back of sustained economic growthand manageable inflation outlook.

The OPR which has been maintained at 1.75% since July 7, 2020 is thelowest on record.

In 2020, the Central Bank slashed the OPR four times for a cumulative 125bps as the economy was marred by a pandemic with a 5.6% contraction in GDP compared to 4.4% growth in 2019.

(Source: https://www.theedgemarkets.com/article/malaysia-entering-high-inflation cycle)

QUESTION 1

Explain the inflation driven by the global supply chain disruptions. How this phenomenon will affect the Malaysian economy as a whole?

QUESTION 2

In your point of view, why do you think the expert worries about the tendency of rising inflation and interest?

QUESTION 3

Discuss why economists reject the hyperinflation risks in Malaysia?

QUESTION 4

Assume that you are one of the manufacturing players, and suggest how to mitigate the risk from the inflation driven by the global supply chain disruptions with your company.

Question 5.

Please doing the executive summary according this article and give the journal and references to support the answer 1-4.