General food prices to increase faster if supply issues unresolved

THE general price of food in Malaysia is expected to rise higher than the 4% uptick registered in the first four months of 2022 if supply conditions remain unresolved, according to RAM Rating Services Bhd (RAM Ratings).

The price uptick was 3.3% for food during pre-pandemic.

The rating firm also said that inflation is expected to pick up this year on the effects of ongoing global supply chain disruptions, which are subsequently transmitted to Malaysia’s consumer prices.

“In Malaysia, the degree of cost pass-through from companies to households is somewhat mitigated by existing subsidies and price controls.

However, as labour-intensive and commodity or import-dependent firms will be most affected by current conditions, the degree of cost pass-through would be significant for these firms.

In particular, the general price of food is expected to climb faster than the 4% uptick registered in the first four months of 2022 (pre-pandemic average: 3.3%) if supply conditions remain unresolved,” RAM Ratings said in a note today.

The firm also noted that the prices of raw commodities (eg food and fuel) and their derivative products (eg fertiliser and metals) have escalated significantly.

“The IMF’s (International Monetary Fund) aggregate global commodity price index jumped 52.7% YTD (year-to-date) in April 2022, markedly faster than the pre-pandemic trend of 1.9% annually between 2010 and 2019,” it added.

According to the note, these broad-based price increases come amid an extended period of unfavourable global supply conditions on the back of the Russia-Ukraine war and economic lockdowns in key Chinese cities.

Export controls in major commodity-exporting countries compound these effects. As a result, most firms globally will face higher production costs.

“We expect Bank Negara Malaysia to mainly adjust interest rates on the basis of economic recovery while also responding to the risk of demand-pull induced second-order effects and inflation pervasiveness,” the rating firm added.

“While increasingly widespread, the extent of price increases is currently less severe than that seen in previous rapid inflationary episodes.

At the same time, second-round price effects or a wage-price spiral is not immediately evident as labour market conditions have yet to fully recover. Nevertheless, rising food prices is a policy concern as at least 20% of the expenditure of most Malaysian households goes towards food,” it said.

The impact of the rising cost of necessities is disproportionately felt by the more marginalised segments of the economy.

Still, RAM Ratings expects the Overnight Policy Rate to gradually normalise to end the year at 2.25% in line with the pace of economic recovery. — TMR