PETALING JAYA: While Malaysia’s factory-gate price deflation continued for the third month in a row, producers are not likely to transfer the cost savings to end-consumers anytime soon.
Other factors such as the weak ringgit and the Red Sea crisis that caused shipping costs to soar could keep retail prices of goods firm, economists said.
Higher fuel prices expected later this year due to subsidy rationalisation would also add to consumer price inflation, despite the easing of production costs.
The Statistics Department reported yesterday that the producer price index (PPI) fell by 1.3% year-on-year (y-o-y) in December 2023, following a decline of 1.5% last November.
The PPI has been on a contraction mode since October last year.
With the latest drop, local factory-gate prices for full-year 2023 declined by 1.9% y-o-y, as compared with a 7.8% y-o-y increase in 2022.
This was the first decrease since 2020 due to the lower prices of Malaysia’s main commodities.
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Factory-gate pricing is the price of goods or services as quoted by the manufacturer, before any taxes, shipping or other fees are added.
Socio Economic Research Centre (SERC) executive director Lee Heng Guie told StarBiz the PPI decline in December 2023 was “not a surprise”.
Meanwhile, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said there is a positive relationship between the PPI and consumer price index (CPI) at about 66%.
The CPI measures the inflation rate of a country.
“Theoretically, this would mean any change in PPI would have similar effects to CPI as the two variables have a positive relationship.
“However, we believe businesses may not simply reduce their prices as they might want to observe consumption patterns among consumers. Businesses might want to keep the price steady as there will be better margins.
“Having said that, the lower PPI would mean the businesses have the flexibility to reduce prices especially if they want to maintain or increase their market share, depending on the intensity of the competition in the industry,” said Mohd Afzanizam.
Lee, on the other hand, said the country’s CPI in recent times has not reflected the easing of PPI. “Yes, the inflation has eased, but not at a scale like how PPI trended down.”
In December 2023, Malaysia’s headline inflation rate remained at 1.5%. This resulted in an annual inflation rate of 2.5% for 2023, compared to 3.3% in 2022.
Core inflation increased more slowly by 1.9% in December 2023, compared with 2% in November 2023.
“Looking ahead, consumer prices will still be rigid. It will take some time for producers to consider transferring the cost savings to end-consumers,” he said.
Lee also expects the PPI to remain soft this year.
Geoffrey Williams, economics professor at the Malaysia University of Science and Technology, also foresees “a modest decline and stabilisation” in PPI in 2024.
“This will feed through to consumer prices around normal levels,” according to him.
Commenting on the PPI contraction in December 2023, he explained that the fall reflects multiple factors including lower costs and discounting to price-to-market.
“Eventually, these should be reflected in CPI and will help to hold up sales as demand moderates,” Williams added.
When asked about downside risks for the PPI this year, Williams and Mohd Afzanizam said the weaker ringgit would make imported components more expensive.
Additionally, Mohd Afzanizam pointed out that supply chain disruption would increase the cost of doing business.
“This could result in higher PPI as what happened in 2021 and 2022,” he said.
Echoing a similar view, Lee said the ongoing Red Sea crisis would keep consumer prices elevated.
About 12% of global trade passes through the Red Sea, including 30% of global container traffic.
The crisis led shipping costs to soar. It is noteworthy that the Drewry World Container Index, a measure of global shipping costs, has nearly tripled since the beginning of last December.
The higher shipping costs could offset the decline in local factory-gate prices.
In a statement yesterday, chief statistician Datuk Seri Mohd Uzir Mahidin said the contraction in December’s PPI was due to the mining sector, whose production prices fell by 3.4% y-o-y.
This was the result of the decline of both extraction of natural gas (7.8%) and extraction of crude petroleum (1.9%) indices.
Meanwhile, the production prices for the manufacturing sector, which accounts for 81.6% of the PPI index weight, continued to shrink by 1.5% y-o-y as against a 1.4% decline a month before.
This was caused by the decline in two indices, namely, the manufacture of coke and refined petroleum products (-12.3%) and the manufacture of food products (-4.2%).
It is worth noting that the production prices for manufacturing shrank for the eighth straight month.
The electricity and gas supply sector also went down by 0.6% y-o-y, similar to the previous month, according to Mohd Uzir.
“Conversely, the agriculture, forestry and fishing sector increased by 1.3% after a decrease of 0.4% in November 2023 due to the incline in animal production and fishing indices.
“At the same time, the water supply index also went up 0.4% in this month,” he added.
In comparison with selected countries, the Statistics Department said the PPI of the United States inched up 1% y-o-y in December 2023 as against 0.8% in November 2023.
Japan’s PPI showed no growth on a yearly basis after an increase of 0.3% in the previous month.
Meanwhile, China’s producer price shrank by 2.7% y-o-y in December as compared to a 3% drop in the previous month.
It was the 15th straight month of producer deflation, highlighting the persistence of deflationary forces in China’s economy.
For a month-on-month comparison, Mohd Uzir said Malaysia’s PPI was lower by 0.2% in December 2023 compared to a 0.7% drop in the previous month.
“With the exception of the agriculture, forestry and fishing sector, which remained unchanged, all other sectors recorded a decline in this month,” he said.
As for the fourth quarter of 2023, Mohd Uzir noted that the PPI recorded a slightly smaller decrease of 1% as compared to negative 1.4% in the third quarter.
The drop in production prices were due to three sectors: mining (-2.5%), manufacturing (-1.2%) as well as electricity and gas supply (-0.5%).