by NUR HANANI AZMAN / pic by TMR FILE
MALAYSIA’S inflation rate, as measured by the Consumer Price Index (CPI) rate, is expected to worsen once the country gets better control of the Covid-19 crisis, amid the likely disappearance of the deflationary tendencies and the likely appearance of inflationary pressures in all its dimensions.
CPI increased to 4.4% in May 2021, and the Centre for Market Education CEO Dr Carmelo Ferlito believes it is not transitory.
“Full Movement Control Order will surely be extended. The complete lack of a sound exit strategy is exacerbating the situation.
The difficulties created by stay-at-home orders force the government to implement new fiscal stimuli and the central bank to operate with extremely low interest rates. This means even more liquidity injected in the system and more inflationary pressures.
“We will see how bad these policies were when we are out of Covid, and the eventual recovery path may be frustrated by a sudden tightening of monetary policy to control rising prices,” he told The Malaysian Reserve (TMR).
He forecasts the inflation rate could reach 8%-9% after the pandemic, depending on how long the government will prolong the pandemic with weak policies amid the political risk locally and internationally.
The high inflation rate in May was underpinned by a lower base effect recorded from last year and a 26% increase in the CPI’s transport segment.
Housing, water, electricity, gas and other fuels, furnishings climbed 3.2%, followed by household equipment and routine household maintenance (2.1%) and food and non-alcoholic beverages (1.5%).
According to the Food and Agriculture Organisation report, the global Food Price Index in May 2021 was at 127.1, an increase of 39.7% against the same month last year and 4.8% compared to April 2021.
The sharp increase in May was driven by the increase in the vegetable oil index (124.5%) due to the surge in demand for biofuels.
This was followed by sugar (57.3%), cereals (36.6%), dairy (28.0%) and meat (10.0%) compared to the same month of the preceding year.
“The increase in the grain index was an effect of the drought in South America which affected the yields of corn and soybean crops, as well as coffee and sugar.
“The highest demand by China has exacerbated the grain supply pressures and increased the producer costs of global livestock,” the statement read.
Ferlito said the elements mentioned in the statement, namely the dry weather in South America and rising demand in China, are only one part of the story.
“Over the past 16 months, supply-side constraints have been induced by the different movement restrictions; together with the general climate of uncertainty. These constraints have created inflationary tensions on raw materials.
“These tensions, together with the excess liquidity created by expansive fiscal and monetary policies, have begun to be reflected in consumer prices. Indeed, if we do not have the deflationary tendencies generated by the current economic crisis, the core inflation would look higher than what it is now,” he added.
Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff said the inflation rate is in a transitory mode due to lower base in previous year, which was in full lockdown and hence lower demand for products and services at that time.
“So, it is not going to sustain over the longer period,” he told TMR.