October inflation expected to continue cooling

PETALING JAYA: All eyes are on the October inflation data due today, as experts anticipate price pressures to continue moderating and to take some burden off the government, whose popularity is tainted by the stubbornly high living costs.

A Merdeka Centre survey this week revealed that 72% of respondents were dissatisfied with the way the government is addressing cost of living issues.

It is, however, noteworthy that Malaysia’s headline inflation has been cooling for 14 straight months, after peaking at 4.7% in August 2022.

In September 2023, the headline inflation was recorded at 1.9%, the lowest since March 2021.

As for October, economists largely think that the country’s inflation rate may fall further or at least, remain steady.

Bloomberg’s poll of 15 economists showed a median inflation forecast of 1.9%.

CGS-CIMB Securities head of economics Nazmi Idrus told StarBiz the consumer price index (CPI) for October 2023 will be a “non-event” without any significant potential surprises.

He forecast the CPI to have grown by 1.8% year-on-year.

“We do notice rice prices being higher than usual in September at 2% month-on-month (m-o-m) – long-term average of about 0.1% m-o-m.

“But considering that global rice prices have eased and the government has embarked on stabilisation efforts, it may grow modestly. Also, rice is only 1.1% of the CPI basket.

“Apart from that, prices of everything else are growing modestly, so that eases some of the pressures,” he said.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid also predicts a headline inflation rate of 1.8%.

“We believe the high base recorded during the final quarter of 2022 would be the key factor for moderate inflation during October this year,” he said.

Meanwhile, Socio Economic Research Centre (SERC) executive director Lee Heng Guie expects a rate of 1.9%, similar to September.

“(Our forecast) largely reflects the moderation in prices of food and services inflation, including transportation,” according to him.

On core inflation, it is also expected to remain steady at 2.5% in October, Lee said.

Mohd Afzanizam opined that core inflation will continue to rise at a moderate pace.

Core inflation measures changes in the prices of all goods and services, excluding volatile items of fresh food as well as administered prices of goods by the government.

Nazmi, on the other hand, said the country’s core inflation in October could “go either way”.

“Core prices might take some time to ease because looking at the core components based on average m-o-m movements, there is still pressure on food prices.

“Core inflation will stay higher than headline inflation for some time fairly due to the base effect of non-core items, in part because commodity prices drove inflation up in 2022 and now it’s driving it down.”

Bank Muamalat’s Mohd Afzanizam pointed out that the real rate of interest in Malaysia has turned positive since May this year.A positive real rate of interest is achieved when the inflation rate falls below the overnight policy rate (OPR).

Given that the real rate of interest has risen, the degree of monetary policy accommodation has become lesser, he added.

“In other words, the cost of borrowings has become expensive in real terms, which resulted in slower expansion in total loan growth.”

Lee, meanwhile, said the central bank is expected to keep its OPR steady at 3% in the first half of 2024, while closely monitoring the monetary policy transmission lags of previous rate hikes, which take about five to 14 months.

“Going by the past monetary policy calibration, Bank Negara seldom responded to policy-induced and price shocks as Malaysia is not an inflation targeting country,” he said.

With the year 2024 on the horizon, SERC’s Lee said next year’s inflation outlook will be influenced by the timing of implementation and magnitude of the targeted subsidy rationalisation on diesel, electricity tariff and petrol.

These are in addition to the liberalisation of price controls on eggs and sugar.

According to him, the average headline inflation is likely to range between 2.8% and 3.5% in 2024, as compared to an estimated rate of 2.8% this year.

Nazmi noted that the country’s easing price pressures have lowered the need for Bank Negara to hike the OPR.

“Over the next few months, there is likely to be some structural adjustments, especially on subsidies. So things like electricity tariffs and fuel prices may see an upward adjustment.

“That could lead to Bank Negara relooking at how these will impact growth and inflation and its strategies ahead.”