Deflation not a cause for alarm as recovery expected this year

The decline is seen as an adjustment to the lower crude oil prices and overall weaker demand


The 0.7% year-on-year (YoY) decline in Consumer Price Index (CPI) in January 2019 should not cause panic in Malaysia as deflation is seen as an adjustment to the lower crude oil prices and overall weaker demand.

The negative CPI is temporary with recovery expected this year forecast to reach 2%-3% in the long term, aided by a higher crude oil price environment, Sunway University economics professor Dr Yeah Kim Leng told The Malaysian Reserve.

Yeah said the decline in crude oil prices towards the end of last year, coupled with easing consumer demand were likely factors behind the contraction.

“A lower tax burden under the Sales and Services Tax (SST), as opposed to the Goods and Services Tax, may have also dampened prices.

“Some manufacturers and producers had also absorbed SST due to the overall weaker demand for goods.

“The persistent cost of living pressure suggests a divergence in the items consumed by the public versus the prices of goods that have come down,” he explained.

The country’s economy experienced deflation for the first time since the 2009 global financial crisis.

The deflation number sent alarm bells ringing when it was announced last Friday, as the last time Malaysia noted CPI contractions was in June-November 2009. The economy declined by 1.5% that year.

Transport costs saw the highest decline at 7.8% YoY among all categories, followed by clothing and footwear at 3.3%, and miscellaneous goods and services at 2.4%.

The drastic drop in transport costs was likely fuelled by the government reversing back to a weekly float mechanism for pump retail prices which resulted in a notable drop in fuel prices.

RON95 was sold at RM1.98 per litre in January 2019 against RM2.28 per litre a year ago, while RON97 decreased to RM2.28 per litre from RM2.55 per litre over the same period. Diesel price was also lower at RM2.12 per litre last month.

Despite the lower price environment seen last year, Malaysians are still feeling the pinch as muted inflation has not translated into a lower cost of living.

Despite the CPI contraction in January 2019, food and non-alcoholic beverages increased 1% YoY and accounted for 29.5% of the overall figure.

Housing, water, electricity, gas and other fuels noted the highest increase at 2% YoY, followed by restaurants and hotels, and alcoholic beverages and tobacco at 2% and 1.1% respectively.

Finance Minister Lim Guan Eng had suggested that the country’s inflation rate will average between 1.6% and 2% this year due to global uncertainties caused by the trade war between the US and China.