PETALING JAYA: The government may consider tweaking fuel prices as its main gear to control inflation, as fuel and lubricants hold 8.5% of consumer price index (CPI) basket and 11.9% of producer price index (PPI), according to MIDF Research.
“By lowering fuel prices, inflation on consumer and producer can be lowered due to their significant weightages,” said the research unit.
MIDF Research noted that based on CPI weightages, transportation and housing and utilities have a significant share in the consumer’s basket.
The items cover 38.4% of the basket while food and non-alcoholic by 29.5%.
“The government may adopt a targeted approach in addressing food inflation spike particularly on specific food items and only can cover the B40 group.
“However, this approach may not help much in cooling off the overall inflationary pressure if it were to spike,” said the research unit.MIDF Research pointed out that as food supply involves many players, it is challenging for the government to pressure down food inflation in the short-term.
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“The government still has bullets to combat inflation by injecting additional funds via a fuel subsidy as guided by the CPI and PPI weightages,” said the research unit.
The subsidy refers to the amount spent by the government to maintain the ceiling prices for RON95 petrol, diesel, liquefied petroleum gas and cooking oil.
MIDF Research expected Brent crude oil price to range from US$75 (RM313.82) to US$80 (RM334.74) per barrel and the US dollar to ringgit exchange rate to average at RM4.09 in 2022.
“Hence, we estimate that the government needs to cover a 9.7% margin of the estimated actual RON95 petrol price, slightly higher than the 6.1% margin in 2021. With these forecast figures, presumably fuel subsidy cost may increase slightly at above RM10bil in 2022 from the RM8bil spent in 2021,” said the research unit.
MIDF Research estimated that should the government cut 10 sen off RON95 petrol pump price to RM1.95, the margin rate would be 15.3% and this may extract RM12bil to RM15bil from the government’s coffers.
Meanwhile, the country’s headline CPI inflation accelerated to 3.3% year-on-year (y-o-y) in November 2021 (October 2021: 2.9%): the biggest gain in five months.
MIDF Research viewed the pick-up in inflationary pressure as mainly caused by cost-push factors namely a constraint in the supply-side and elevated energy prices.
The double-digit pace in PPI, electricity and transportation inflation, among others, contributed towards the rising inflationary pressure.The research unit noted that with supply bottlenecks and elevated commodity prices, input inflation broke a new record as the PPI inflation accelerated to a record high, increasing at 13.2% y-o-y in October 2021 (September 2021: 12.3%), reflecting intense input cost in production activity.
By stage of production, the cost of crude materials rose by 40.4% y-o-y – the fastest pace in five months.
Non-food crude materials are the biggest contributor coming from both non-crude fuel and crude fuel.
At the later stage, intermediate materials are also facing higher input inflation, registering a new record high of 11.7% y-o-y in October 2021.
On the flip side, the cost of finished goods is contracting at marginal pace dragged by capital equipment.
“Looking ahead, we foresee input inflation softening gradually by the middle of next year as the low-base effect fades and gives fewer disruptions in the global supply chain,” said the research unit.
MIDF Research also noted that the uptick in PPI is in line with the recovery in the industrial production index and exports performances.“We believe that the global supply bottlenecks will ease gradually especially in the second half of 2021 as more economies reopen and with the relaxation of containment measures,” said the research unit.