The Star: Inflationary pressure to prolong into 2022

PETALING JAYA: Inflationary pressure in Malaysia is expected to prolong going into 2022, according to economists.

This is given the rising global food and transportation prices that can lead to further disruption in the production supply chain amid growing concerns over the spread of the Omicron variant.

Overall, economists have pegged the inflation rate to between 2.3% and 3% for next year.

In November, the headline inflation, as measured by the consumer price index (CPI), accelerated to a five-month high of 3.3% year-on-year (y-o-y).

When contacted by StarBiz, economist Shankaran Nambiar expects inflationary pressure will continue in the first half of 2022.

“So far, it does not look like the inflation numbers can be flattened in the first half of 2022,” he added.

Nambiar also foresees transportation problems arising from the high logistic costs and congestion at the ports that would probably persist in the first quarter or even in the second quarter of 2022.

Furthermore, the cost of raw materials and intermediate goods could likely remain at higher levels compared with the pre-Covid-19 period.

“The cost of food items will not drop for a while, given the bad weather, high cost of fertilisers and labour shortage.

“The low value of the ringgit against the US dollar could also have some effect to a certain extent,’’ said Nambiar, who is the head of research at the Malaysian Institute of Economic Research (MIER).

He opined that inflation could easily touch 2.5% this year.

“Should the government policies take effect, then I expect that inflation could likely moderate to about 2.4% next year.”

Nambiar also pointed out the supply issue of migrant labour into the country.

“How quickly the supply of labour can be normalised is yet to be seen. If all these issues are not effectively contained, then our inflation could touch 2.7%.

“MIER is looking at an inflation rate of between 2.4% and 2.7% for next year,” he added.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid concurred that high food and transportation costs could further fuel inflation next year.

He said the supply bottleneck would take a while to be resolved as some industries continue to face problems in procuring labour and raw materials in a timely manner.

The country’s heavy dependency on imported food could also weigh on inflation, especially when the ringgit continues to remain weak.

“Given such an environment, prices are likely to remain elevated next year,” added Afzanizam.

He projected that Malaysia’s inflation will come in at 2.5% for 2021 and 2.3% for 2022.

On the other hand, AmBank Group chief economist and member of the Economic Action Council Secretariat Anthony Dass is of the view that inflation could ease over the coming months in 2022, despite the current bearish factors, which warrants inflationary pressure.

While the headline inflation may potentially ease, he said: “It remains unclear if the underlying inflationary pressure would taper.”

Given the increase in food and transportation prices, Dass noted that it is unlikely that prices would revert back “as once prices go up, it is difficult for it to come down.”

With the headline inflation expected to hover around 2.4% to 2.6% for 2022, the real challenge will be on the underlying inflation where the cost of living has swelled up, Dass pointed out.

This has eroded the purchasing power, especially for the B40 (bottom 40) segment badly and also hurting the M40 (middle 40) group.

There is also room for a hike in the interest rate by the second half of next year, said Dass, adding that the possibility for it to happen is in the third quarter of 2022.

Apart from the monetary policy, there is an urgent need for a quick policy response to check on inflation and its spillover impact on the rising living costs that is hurting the man on the street, he noted.

Meanwhile, Socio-Economic Research Centre executive director Lee Heng Guie said the increasing costs and consumer price pressures would persist next year.

“If businesses are unable to absorb these accumulating costs which also erode their profit margins, some businesses and manufacturers may have no choice but to pass on to consumers in the form of higher consumer inflation.

“We expect the headline inflation to increase higher to 3% in 2022 from an estimated 2.5% in 2021,” he added.

Bank Islam’s Afzanizam opined that Bank Negara may raise its overnight policy rate (OPR) target by 25 basis points (bps) in the third quarter of 2022 due to inflationary pressure.

The main consideration would include the ongoing economic recovery as well as to avoid the negative real interest rate to become persistent, he noted.

MIER’s Nambiar said a sliding ringgit may force the central bank to raise the borrowing costs from the second quarter onwards. The OPR is now at a record low of 1.75%.

On the impact of higher prices, SERC’s Lee said the high inflation along with increased cost of living would be bad for households as it will reduce the consumers’ purchasing power.

“Inflation will help to increase the earnings of commodity producers and processors of commodities.
“The real estate-related industries will also benefit from an increase in house prices due to higher cost of building materials and buyers will consider investing in property to hedge against inflation.

“The rental prices will rise with the overall inflation, thus helping property owners.”

However, Lee said companies with large inventories will face problems in an inflationary environment.

“Companies are going to replace sold merchandise with higher cost of goods and hence, margins will be squeezed,” he added.

In an inflationary environment, Dass said investors might also turn to tangible assets as the purchasing power is impacted.

“Investors tend to go for gold during inflationary times, causing the price of the commodity to rise on the global markets.

“Furthermore, gold can be purchased directly or indirectly.”

Other types of investments which have been historically viewed as “hedges or protection” against inflation include real estate, commodities and certain types of stocks and bonds, he said.