PETALING JAYA: While global inflationary pressure will continue to rear its ugly head, there is minimal risk of it disrupting the domestic economic recovery, thanks to the government’s measures.
Economists expect the consumer price index (CPI) to trend higher in the first few months of the year to reflect higher food and fuel prices before easing lower.
Bank Negara said average inflation for 2022 is likely to remain moderate as the base effect from fuel inflation dissipates but core inflation is expected to edge upwards as economic activity normalises amid the environment of high input costs.
Malaysia’s inflation, as measured by the CPI, had increased 3.2% in December 2021 from a year earlier. This is mainly due to the rise in food and fuel prices and a low base effect. The annual inflation rate in 2021 showed an increase of 2.5% compared with a contraction of 1.2% in 2020.
CGS-CIMB Research economist Nazmi Idrus said the multitude of measures announced by the government could mitigate the global price fluctuations seeping into the domestic side.
“The government has been known to be fairly effective in managing price pressures with measures ranging from price controls to higher subsidy allocations. Overall, we see CPI inflation at 2.5% year-on-year (y-o-y) in 2022. Our current forecasts include the adjustments to more persistent commodity prices, as well as recent developments including the price controls and higher Tenaga Nasional Bhd tariff for non-domestic users.
“However, the commodity price outlook remains a major factor and, if our assumptions of milder prices in the second half of the year do not materialise, we could revise our inflation forecast higher,” he added.
He noted that based on the research house’s analysis, the impact of price movements on the economy shows that global price shocks do trickle down to the CPI.
However, private consumption may not be negatively affected by positive price shocks, while a rise in interest rates following higher inflation depends on whether inflation is coming from the demand or supply side.
Overall, Nazmi said contrary to current perceptions, he sees little risk of inflation disrupting the economic recovery.
“We expect the central bank to continue to focus on domestic growth, particularly the improvement in private consumption and the labour market. We still expect Bank Negara to raise interest rates twice in the second half of the year by 25 basis points each.
On the global front, he said there is unlikely to be significant easing of price pressures on the global basis in the near term. Some easing of supply chain issues and the subsequent lower freight costs would provide some offset, but not much relief.