Malaysia's inflation may remain high in Sept: Economists

(Business Times, 23/10/2007)

INFLATION will probably remain high in September as festivities placed price pressures on food necessities in Malaysia.

Economists polled by the Business Times are expecting inflation to average 1.96 per cent year-on-year.

The August consumer price index (CPI) rose to a six-month high of 1.9 per cent year-on-year on the back of a weaker ringgit and higher food and cigarette prices.

The Statistics Department will release the details of the CPI for September on Wednesday.


"Inflation readings have managed to stay at about 1.5 per cent for several months, thanks largely to the strong currency as well as the high base last year," remarked DBS Bank economist Irvin Seah.

The base effect (from last year's hike on pump prices for petrol) has finally come off but the price ceilings on some basic necessities have put the lid on price pressures during the Ramadan festive season.

Full year average inflation should remain relatively modest at 2.1 per cent, he added, within the comfort zone of the central bank.

"However, crude oil prices hit a new record high of US$85.80/bb (brent) on October 18 and that certainly raise the risk of the authority hiking pump prices in order to reduce the burden of its oil subsidies.

"If oil prices continue to remain high or edge even higher in the next four to six months, the chance is high that the government may once again hike pump prices as was done on February 28."

With inflationary risks on the upside, the central bank is most likely to keep the key benchmark rate at 3.50 per cent in the forthcoming meeting on October 30 while allowing the expansionary fiscal policy to keep growth on track.

Citi Asia-Pacific economics and market analysis director Dr Chua Hak Bin expects inflation to continue to climb further.

"Inflation will likely continue climbing, possibly rising more sharply next year on likely fuel subsidy cuts and transport fare hikes," he said, adding that average inflation could rise by some 0.5 to one per cent next year because of possible hikes in petrol pump and electricity prices.

"Toll and transport fares will also likely be raised next year.

"Toll rates may be raised by about 10 per cent on January 1 although the government is deciding whether to absorb part of the toll increase.

"The impact on the CPI is about 0.1-0.2 percentage points."

September is expected to see an increase, mostly attributed to higher prices of meat products during the festive season.

There was also possibly some shortage of food and pharmaceutical items arising from the alert over China food items although the stronger ringgit may have however helped to curb imported inflation.