This article first appeared in The Edge Financial Daily, on August 8, 2016.

KUALA LUMPUR: Food is getting costlier in Malaysia nowadays. And higher food prices are eating into consumers’ spending power, particularly the low- and middle-income groups.

This may not augur well for consumer spending as households have to tighten their belts when grocery bills are getting more expensive each month.

“Food inflation is a real concern for us; it has been escalating for many months,” Malaysian Institute of Economic Research’s executive director Dr Zakariah Abdul Rashid told The Edge Financial Daily.

The reading of the Consumer Price Index (CPI), the country’s inflationary pressure, is tamed. The increase in the index decelerated between April and June. In June, the CPI went up by 1.6% year-on-year (y-o-y), while the index rose 2% in May and 2.1% in April.

However, the index for food and non-alcoholic beverage increased 4.2% y-o-y in June and 4.1% in May. Food and non-alcoholic beverage account for nearly one-third of the CPI composition.

Higher food prices have indeed raised concern that the growth on private consumption — the key growth engine for the country’s economy — may be dampened.

Refined sugar prices have increased by RM600 to between RM2,400 and RM2,500 per tonne for industrial consumers under approved permit segment. But there is no hike in retail prices of refined sugar.

Still, food and beverage (F&B) manufacturers and confectioneries will face higher raw material costs. Will there be a domino impact on consumers?

“F&B manufacturers and confectionery firms consume a substantial amount of sugar. As their intermediate inputs cost higher now, they may ultimately pass on to the final consumers,” said Zakariah.

“I think consumers may feel the pinch, noting that food-price inflation is more than double the headline inflation,” Zakariah emphasised.

While the government is counting on private consumption to spur the economy, Malaysians’ spending power may be limited no thanks to the rising cost of living and high household debt, which is about 89% of the country’s gross domestic product.

He said, the headline inflation of 1.6% in June has shown that private consumption is not driving the economy. The reasons, to him, could be the high household debt. Furthermore, generally Malaysians are earning too low salaries.

When contacted, UOB Malaysia economist Julia Goh Mei Ling is of the view that the rising food inflation is reflecting operation costs are generally going up, and the manufacturers have to pass on the cost increments to consumers.

She noted that the index for food has actually come off the peak of 5% in March. Going forward, she expects it would be held at around current level. She maintains her forecast of headline inflation at average 2.4% this year.

Goh said the government is aware of rising food prices and tries to curb the impact by embarking on  such as reducing the dependence on imported items, setting up shops like Kedai Rakyat 1Malaysia.

“The problem is some measures may be out of reach for all Malaysians, thus, majority are still living in a city that food is costly,” she said.

Due to a series of price hikes, she anticipates further support measures for the lower- and middle-income groups to be announced in the coming budget.

Meanwhile, Maybank Investment Bank chief economist Suhaimi Illias opines that there are many factors influencing consumer spending. He is positive that the slowdown in consumer spending post-goods and services tax has bottomed.

He sees signs of recovery in consumer spending as it has picked up since the fourth quarter last year and latest Department of Statistics data on monthly retail sales index suggested that the recovery in consumer spending was sustained in the second quarter this year.

“So while consumer spending growth will slow to 5.3% this year from 6% last year, we see it improving to 5.8% next year,” he said, adding that measures to directly boost income, especially for the low- and middle-income group — such as BR1M (1Malaysia People’s Aid), cut in workers’ contribution to Employees Provident Fund, mininum wage hike, civil service salary increase, personal income tax relief for middle-income taxpayers — are working.

“There is also the recent OPR (overnight policy rate) cut by BNM (Bank Negara Malaysia) with expectations that there could be at least one more round,” he said.