Businesses may increase costs if PPI inflation remains high

The mining and manufacturing sectors recorded faster PPI inflation at 20.6% YoY and 10.1% YoY respectively, says MIDF


MALAYSIA’S producer prices rose slightly faster at 11.2% year-on-year (YoY) in May 2022 from 11% YoY in the previous month as local suppliers continued to face challenges from rising cost pressures, said MIDF Research.

According to the research house, the mining and manufacturing sectors recorded faster producer price index (PPI) inflation at 20.6% YoY and 10.1% YoY respectively. 

“Although the rate of PPI inflation for the agriculture, forestry and fishing industry slowed to 16.7% YoY, the double-digit increase highlights the ongoing upward pressures, especially for food prices,” MIDF said in a research note today.

MIDF views that factors such as rising import costs, shortages of labour and high commodity prices add to the inflationary pressures experienced by local producers, on top of other supply constraints and disruption in the global supply chain. 

“With PPI inflation remaining above consumer price index (CPI) inflation, we opine businesses may pass on more cost increases to their consumers. 

“In other words, apart from growing demand, the rise in selling prices continued to be underpinned by pressures from the supply side,” it said.

Meanwhile, MIDF noted that the US consumer confidence index has declined for the second month to 98.7 on June 22 versus 103.2 in May 2022, the lowest level in 16 months. 

Thus, American consumers have expressed a more pessimistic view of the future economic outlook as the expectations index fell to 66.4, the weakest reading since March 2013. 

“As a forward-looking indicator, the weaker consumer confidence points towards weaker momentum in the latter part of the year as Americans are more worried about inflation, particularly due to higher fuel and food prices,” it noted.

Nevertheless, it views that the perception of the present economic situation was relatively unchanged from the previous month, despite a less favourable assessment of current business conditions and mixed views on the labour market.

“Similar to the decline in University of Michigan consumer sentiment in June 2022, the weaker confidence signals consumers would hold back their spending plans, especially for big-ticket items,” it added.

Hence, MIDF expects near-term sentiment and spending activities will continue to be influenced by the high inflation and rising borrowing cost, with the US Fed to continue tightening its monetary policy.