When prices go up, spirits come down

Inflation is becoming a thornier problem than volatile stock markets and rising oil prices

(Business Times Singapore, 22/1/2007)

CONSIDERING Wall Street's massive 2.64 per cent sell-off last Friday, Asian and European markets can count on a torrid week ahead.

Before the US's humongous sub-prime issues could be tackled, crude oil futures breaching US$90 a barrel - with talk of it soaring to over US$100 by year-end - had stoked inflationary and earnings fears, and worries of a general slowdown in the economy.

Despite local firms continuing to show better corporate earnings growth and little, if any, exposure to the US's sub-prime problems, the impact on the Malaysian market appears inevitable.

External volatility is beyond one's control. Where the stock market is concerned, any sharp tumbles would be unfortunate given that Malaysia was very late, years behind other markets in fact, getting onto the bull. Those who remember the days what the ringgit was worth often observe that in ringgit terms, the benchmark KL Composite Index (KLCI) is still nowhere near its peak of the early 1990s. If one considers the KLCI's 1994 high of 1,332 was achieved when the local unit was about RM2.50 to the US dollar, its present day level of 1,376 at RM3.36 to the US dollar isn't too much to shout about.

Nonetheless, compared to its moribund years after currency controls were imposed in 1998, there is much to be thankful for.

On the economic front, hefty expansionary budgets will likely result in the projected 5-6 per cent growth over the next two years, albeit slightly weaker if global growth slows.

The greater concern is inflation. Despite government assertions that inflation is a mere 2-plus per cent - many items in the basket of goods by which inflation is measured is price controlled - the average Joe Blow is far from convinced.

Many expenses such as tolled roads which are an essential feature of city life, particularly in the Klang Valley, are not included in the basket. Even attempts to curb the cost of items in the basket are beginning to backfire. In the past years, commodity prices have soared on the back of expanding global demand.

Malaysian builders have screamed about the shortage of steel bars and billets, fingering steel millers who, they claim, prefer to export them if builders do not pay above ceiling prices.

Because of the expansive drought in Australia, the price of wheat flour has also shot up by an enormous 80 per cent since April. If the government does not give flour millers a price increase, millers warn that there is little incentive to import the wheat, which is a main ingredient in bread, noodles and Indian rotis.

The price increase in innocuous items such as corrugated cartons has been surprising. In January, the Malaysian Corrugated Carton Manufacturers' Association (MCCMA) raised prices of corrugated carton and its related products by 15 per cent. Last month, it announced another 15 per cent hike, adding that paper costs had spiked, as had production costs, 'due to the
rise in prices of fuel (up 70 per cent), electricity (13 per cent), transportation (30 per cent) and labour cost (5 per cent)'. MCCMA has warned of another hike as paper prices are likely to spiral further in the next six months.

On a more 'essential' front, Malaysia's public transport operators have submitted proposals to the government for fee hikes of 100-600 per cent next year, saying that they can no longer bear the burden of higher operating costs. Toll increases are scheduled for a number of operators next year.

The government gave the country's one million-odd civil service a pay rise of between 7.5 and 42 per cent in July - the first since 1992 - but with inflationary forces so unrelenting, it will be interesting to see how Malaysia deals with a problem that, falling markets aside, is a thornier
problem and one that is unlikely to go away anytime soon.