Economists foresee inflationary pressures but not ‘stagflation’

For stagflation to happen, the economy needs to experience high in ation and very low growth, a researcher says


ECONOMISTS believe Malaysia will be facing mild inflationary pressures ahead due to the higher crude oil prices but will not experience stagflation as nervous financial markets abroad are starting to price in the possibility.

MIDF Research VP and head of research Imran Yassin Md Yusof said for an economy to head to stagflation, it needs to be experiencing high inflation and very low growth, both conditions not met in Malaysia’s case.

“However, we have to remember that we have seen crude oil prices at current level pre-pandemic and before the oil price war of last year.

“We also have to understand that the current retail price for RON95 petrol in the country is being kept at RM2.05, which will moderate the impact of the higher oil price on inflation,” he said.

In fact, he added that Malaysia stands to benefit from the higher crude oil price as the country is an exporter and this is expected to increase government’s revenue and benefit the oil and gas industry with possible higher capital expenditure from the oil majors and national oil company, Petroliam Nasional Bhd, if prices can sustain over a longer time period.

Stagflation refers to a period when inflation remains stubbornly high, costs keep rising while unemployment escalates and causes demand to become stagnant and economic growth slumps.

“There’s also the fact that more supply could later come on stream as OPEC+ may increase its production which could curtail the rise in oil prices,” Imran added.

Economic analyst associate professor Dr Baharom Abdul Hamid said as normal business activity resumes, there would be some impact on demand pull inflation, however, it would be temporary, and if all points north, unemployment would decrease, with reestablishment of old positions and creation of new posts.

“However, we have to look at this cautiously, the pandemic has also inadvertently shown that some positions are redundant, and could be permanently phased out.

“Most of the industries, and households are already expecting this inflation, they would be prepared — it’s called rational behaviour towards expected inflation,” he told The Malaysian Reserve (TMR).

Centre for Market Education CEO Dr Carmelo Ferlito said stagflation is a mix of inflation and economic downturn (in the form of negative growth and/or unemployment).

Given the change in policy the new government has taken — centred on a high-speed reopening of the economy, already hinting at international borders, Ferlito expects the economy to be in the positive territory and therefore, the local economy should not see stagflation but inflation.

“I have been warning about the risks of inflation already for a few months, independently from oil prices, which are a component, but not a structural component of inflation.

“In fact, I observed that the expansive monetary and fiscal policies adopted in order to fight the harms created by lockdowns may plant the seeds for a post-Covid economic crisis,” he told TMR.

Meanwhile, Malaysia University of Science and Technology professor Dr Geoffrey Williams said there was a very sharp fall in oil prices last year around April to US$37 (RM154.63) per barrel and a very steep recovery since then to around US$80 per barrel at present.

“We saw this effect on the Malaysia’s Consumer Price Index (CPI) earlier in the year and it was well signalled and controlled by Bank Negara. This effect has passed and now headline CPI inflation in August was only 2% and July 2.2%.

“Throughout the year, core inflation and CPI without oil have both been very low and were only 0.6% and 0.5%, respectively, in August. This is a better indication of the inflation environment and actually it is very low and the possibility of deflation is more of a concern than inflation, although it’s a very small possibility,” he told TMR.

He said inflation is likely to remain flat and around 2% by the end of the year, well within normal range.

“In fact, we have no concerns about inflation, and if anything, the low core inflation and non-oil inflation show that market conditions are still very bad and we are not in recovery yet,” he pointed out.

There are two considerations for Malaysia — first petrol prices are controlled so that helps and second, Malaysia benefits from high oil prices.

“The government estimated petrol revenues at RM37.9 billion when the price was US$42 per barrel. It has almost doubled now so this is good for government income. It will help rebalance the budget and reduce the need for tax increases for example,” he said.

Williams said every US$1 rise in oil prices adds roughly RM300 million of oil related revenues, which adds to about RM13 billion on an annual basis.

“In terms of the overall inflation environment, there is some concern due to low core and non-oil inflation and also there is a huge underused capacity in the economy due to the lockdowns.

“In fact, in the second quarter, there was a large increase in inventory stocks of around RM15.8 billion in real terms. So, this is an indication of excess capacity which means price pressures are more on the downside than the upside,” he reckoned.