A turnaround in CPI expected in 2021 on commodity prices


INFLATION level in the country is expected to reach 1.7% this year following an expected pickup in demand in the second half of 2021 (2H21).

Sunway University Business School economist Prof Dr Yeah Kim Leng said although the headline Consumer Price Index (CPI) has remained in the negative territory since March last year, it is possible for it to edge up to 1.7% this year underpinned by higher commodity prices.

“The expected positive turn-around is attributed to the recovery in demand that will pick up speed in the 2H21, and underpinned by firmer world crude oil and commodity prices as the global economy recovers from the pandemic.

“At 1.7%, inflation remains benign and below the five-year trend of 2.9% per annum,” he told The Malaysian Reserve recently.

Malaysia is still facing deflationary pressures as the CPI declined 1.7% year-on-year (YoY) in November last year to 120 against 122.1 in November 2019.

Chief statistician Datuk Seri Dr Mohd Uzir Mahidin said out of 552 items covered in the index, 334 items showed an increase in November last year against a year, prior which 153 items declined and 65 items were unchanged.

On the unemployment rate, Yeah said the uncertainty surrounding the Covid-19 pandemic and the duration needed to curb the current virus resurgence would lead to a more gradual recovery in the area.

“Unemployment has edged up to 4.8% in November from 4.7% in the previous month indicating that the third Covid-19 wave has slowed job creation amid job losses.

“It will therefore be challenging to achieve the 3.5% unemployment rate target laid out in Budget 2021.

“A 4% unemployment appears to be reasonable after taking into consideration the new Movement Control Order (MCO) and ensuing job losses that will likely edge up as more businesses come under financial stress,” he added.

Meanwhile, Standard Chartered plc had forecasted for the CPI to pick up to 2% this year after registering -1.1% last year.

In its recent Economic Outlook 2021, the firm stated that transport costs are likely to be a major contributor to inflation, following an expected rise of 26% on oil price this year.

“However, we expect demand inflation to remain subdued due to the negative output gap.

“We, therefore, lower our 2021 CPI forecast to 2% from 3.3%, and we expect core inflation to stay low at 1% in 2021 (1.1% in 2020).

“We raise our 2020 CPI forecast to -1.1% from -1.8% to reflect higher than expected prints so far this year. At these inflation levels, we expect the central bank to remain comfortable with its current accommodative stance,” it said.

It also foresees the current account surplus to narrow to 1.7% of GDP, from a projected 3.6% in 2020 as activity picks up this year.

The 2020 surplus has been boosted by a sharper contraction in imports relative to exports and a one-off settlement transfer tied to a wholly-owned government subsidiary, the firm noted.

“Capital-goods imports should pick up as the government restarts infrastructure projects. The government increased development expenditure by 38% to RM69 billion in the 2021 budget, of which RM15 billion (+47.5% YoY) is allocated to transport development.

“Intermediate-goods imports have also been falling, but as global demand picks up in 2021, we expect manufacturers to rebuild their inventory,” it said.