KUALA LUMPUR: Malaysia’s inflation may have peaked in line with the trend seen in the United States (US) and the United Kingdom (UK) although prices will remain elevated.
Bank Islam Malaysia Bhd chief economist Firdaos Rosli said the government needs more investments in key inflation items such as housing, food, transport and energy so that prices can be more stable over a longer time horizon.
“Lowering house prices is quite complex as it involves varying stakeholders, but not the other three main items. The increasing application of environmental, social and governance (ESG) standards helps, but it cannot be the sole channel for technological upgrading,” he told Bernama.
Firdaos said that while governments promote a low-tariff environment to reduce price translation, behind-the-border trade barriers must be transparent or reduced to encourage more investments in key Consumer Price Index (CPI) items.
“Theoretically, investments tend to go up as taxes come down. We rarely hear about investments in items that affect everyday goods and services we consume daily, so this scenario warrants a closer look,” he said, adding that wages must go up alongside rising prices.
The economist explained that out-of-home food prices are primarily driven by the quality of services, which is much harder to assess.
Food deliveries are making lives much simpler but at the expense of higher prices due to the higher level of services rendered.
“Besides, investors and business owners may not have the appetite to boost manufacturing and infrastructure investments when borrowing costs are climbing at a level unseen in decades. Let alone investments in key CPI basket items.
“Although aggressive tightening may yield lower inflation in 2023, the world may again suffer from cost-push inflation amid supply shocks, and demand-pull as wages and population grow. Investments, with a view to improving productivity, in these key areas have no substitute,” he stressed.
Inflation likely to ease in 2023
Firdaos said the country’s inflation would likely come down in the coming months of 2023 in line with the moderating inflation rate seen in the US and the UK though taming it is far from over.
Albeit lower inflation in 2023, he said, the topic will remain contentious for two reasons -- one, despite a moderating CPI on a year-on-year basis, the index itself (i.e. the price level) will trend higher.
“Two, owing to the US Federal Reserve’s aggressive stance in reining in inflation, the CPI and the personal consumption expenditures (PCE) index are declining but still trending well above their target rate of two per cent. The same scenario is seen in the UK and European Union as well,” he said.
The economist said as a result, the policy rates of these major central banks will trend higher for longer and the scenario would put much pressure on emerging currencies, ergo imported inflation.
According to Firdaos, Malaysia’s Overnight Policy Rate (OPR) would probably rise closer to its pre-pandemic levels in 2023 amid the widening policy rate and yield gaps.
Economists in general are of the view that Bank Negara Malaysia would raise the OPR by another 50 basis points to 3.25 per cent this year amid expectation that inflationary pressure would ease.
Meanwhile, Firdaos said, as there is no end in sight to the Russia-Ukraine military conflict, energy prices would likely remain elevated in 2023, thus making central bankers continue to tame inflation.
“It will get more complex when China’s economic reopening eventually pushes energy demand higher in the coming year,” he said.
Govt intervention to tame inflation
Firdaos said policymakers assess inflation from the price level and surveys.
“Economists believe that inflation counteracts unemployment and correlates with policy rates. In simple terms, when inflation is high, unemployment is low and the policy rate tends to increase.
“The reverse relationship also holds; hence, demand-pull and cost-push as the two common types of inflation,” he said, noting that governments monitor prices more closely than they do incomes.
He shared that the recent global inflation is a combination of the two phenomena. Demand-pull happened amid rapid post-pandemic labour market recovery, whereas cost-push resulted from high energy prices, which took place almost overnight due to the military conflict.
The unfavourable foreign exchange terms amid the strengthening US dollar have made it worse for all but the US and, to a certain extent, Hong Kong and Singapore. All eyes are on central banks to intervene whenever inflation becomes a national issue.
“We often overlook the role of fiscal policy in taming inflation, if any. One reason is that fiscal policy appears to be more ‘restrictive’ than monetary policy, more so when governments are out of ammunition to counterbalance the deleterious effects of the pandemic.
“Another reason is that, unlike the interest rate, policymaking is extremely complex when assessing the wages/incomes perspective as it differs from one economic centre to another.
“Lowering taxes is problematic as tax foregone could attract more problems when the labour market is tight and may even affect the core functions of the government as revenues fall. On the contrary, raising taxes to stifle demand growth is inopportune, so we can safely discard that,” Firdaos said.
He said the natural thing to do is to expect monetary policy to tame inflation via demand-side intervention.-Bernama
