GLOBALLY, headline consumer inflation has increased in advanced and emerging market economies since 2021.
The annual rate of inflation in the United States hit 7.5% in January 2022, the highest in more than three decades; eurozone inflation hit a new record high of 5.1% in December.
Other inflation metrics also have shown significant increases in recent months, though not to the same extent as the consumer price index (CPI).
Inflation was driven by rapidly rising commodity and energy prices, input shortages and supply bottlenecks (induced cost passed through onto consumer inflation), and a recovery in demand post the Covid-19 pandemic.
Prolonged supply disruptions, commodity and energy price shocks, elevated input costs and shipping costs, revived demand post the pandemic’s economic reopening, and a de-anchoring of inflation expectations could lead to significantly higher inflation, compelling appropriate monetary and fiscal policies to stem further rise in inflation.
Malaysians who have been to the grocery stores and restaurants as well as hawker stalls or started their festive holiday shopping may have noticed that consumer prices have spiked.
Malaysia’s headline inflation has been increasing since August 2021 (2.0%) to 3.3% in November and 3.2% in December 2021, largely driven by higher prices of food and non-alcoholic beverages, furniture and furnishing, household appliances, restaurant and hotels, and financial services as well as transportation.
Food, which is one the largest group of consumption expenditure for Malaysian households, registered the largest increase in prices (3.4% year-on-year in December 2021) in nearly four years.
A broad-based increase across prices of food at home (4.1%) and away from home (2.2%) in December, with all food items seeing significant hike in prices such as fresh meat and eggs.
The government will spend RM528.5mil in subsidies on chicken and egg for a four-month period (Feb 5 to June 4) to keep prices stable amid increasing costs incurred by the poultry and egg industry.
Nevertheless, the general public said general price levels have increased more than what was reported by the CPI. Some have guesstimated that inflation is at least 6%-7% to as high as 10%.
The CPI is a weighted index of a sampling of the universe of goods and services purchased by consumers and, as a result, may experience some serious blind spots.
Understanding why the rate of inflation has risen so quickly could help clarify how long the surge might last and what policymakers should do about it.
It appears that the acceleration in the rate of inflation is fundamentally different from other inflationary periods that were more closely tied to the regular business cycle.
Looking ahead, we expect headline inflation to stay elevated in most parts of this year even if the current increases in prices that were due to supply chain bottlenecks and input costs, fade away over time.
While annual inflation will moderate on a year-on-year comparison due to “technical base” statistical effect, the price levels will not come down due to price stickiness.
In our assessment, inflation risks tilted to the upside with cost and price pressures coming from the 11.0%-18.4% increase in electricity surcharge for commercial and industrial users in addition to the persistent cost-driven price pressures on both businesses and consumers.
Inflation expectations are expected to rise higher as the headline news have reported the current and potential hike in prices of consumer durables and non-durables.
Another wild card that could set off another round of price increases and consumer inflation is a gradual removal of the fuel subsidy on the retail price of RON95 and kerosene, which is currently capped at RM2.05 per litre and RM2.15 per litre respectively.
Given the recovery’s uncharted nature amid high levels of reinfection and considerable external headwinds, prompt intermittent measures combined with appropriate monetary and fiscal policies must be implemented to prevent “inflation scares” from unhinging inflation expectations.
Policymakers need to prepare contingency plans for its actions if sustained high inflation looks like becoming embedded, with inflation expectations rising.
What has started as cost-pushed inflation could be reinforced by wage demands to compensate for the rising cost of living.
The current tightening labour market conditions have bid higher wages for some sectors that are in shortage of workers.
Given the proposed 25% increase in minimum wage rate by RM300 to RM1,500 per month, together with the hike in electricity surcharge for businesses, both will add onto increased business operating costs, forcing businesses to pass on increased costs to consumers.
We are of the view that price ceiling controls should be implemented as a temporary stopgap measure to keep prices of essentials stable.
A prolonged period of price ceiling controls would backfire and disrupt the demand and supply equilibrium.
Producers and manufacturers will not adjust their supply because the ceiling is blocking prices from the price information transmission.
Increasing the cost of production has squeezed producers’ margin and pushed them into losses as the cost price was outstripped by the current ceiling price, which is setting below the equilibrium level.
Given the uncertainties about the duration of higher inflation, wages, and the labour market condition, Bank Negara’s monetary policy decision will face a trade-off between supporting economic recovery and stabilising inflation.
Moving too slow could squander the window of opportunity it will have to anchor inflation expectations with interest rates already at historical low levels.
The economic cost of not taming sustained high inflation risk could be damaging to the economic recovery.
The return of higher and less stable inflation would cause the ringgit’s exchange rate volatility in an environment of heightened rounds of interest rate hikes in the US.
Lee Heng Guie is executive director of Socio Economic Research Centre. The views expressed here are the writer’s own.