This article first appeared in The Edge Malaysia Weekly on February 12, 2018 - February 18, 2018

EQUITY investors are worried about mounting inflationary pressure in the US as Americans spend more as they earn more.

Concern over higher-than-expected inflation took centre stage last week, sending the US stock markets on a selling spree. The selling wave swept across the globe as the US sneezed.

Investors were fleeing from equities, worried that the US Federal Reserve may resort to raising rates faster than expected to tame inflation should wages continue to rise on the back of a much stronger US economy.

Bursa Malaysia was not spared the selldown, although it was not as fierce as elsewhere. What about Malaysia, which already experienced rising inflationary pressure last year at no less than 3% each month? Should we be worried?

According to RHB Research chief Asean economist Peck Boon Soon, inflation should not be a major concern for Malaysia this year. It is expected to moderate to an average of 3% from an average of 3.7% last year. The moderation in inflation, he says, is because fuel price increases are not expected to be as high as last year.

He adds that the inflation situation in the US — which has seen a prolonged period of low inflation — is vastly different from the situation in Malaysia.

MIDF Research chief economist Dr Kamaruddin Mohd Nor agrees that inflationary pressure will taper this year, forecasting that it will fall to 2.6% year on year.

“Our labour market is improving and wage growth is encouraging, but we foresee demand-driven pressure on core inflation to remain within an acceptable band of 2.2% in 2018,” he says.

Kamaruddin sees inflation in the US gradually gaining traction given the trend of prices in recent months. Although headline inflation in the US is picking up, core inflation remains stable at 1.8%.

“A tight labour market and rising commodity prices help put pressure on prices. However, we do not foresee core inflation overshooting the US Federal Reserve’s 2% target, at least in the near term,” he adds.

Kamaruddin believes that it would only be a concern for Malaysia if US core inflation overshoots the Fed’s target and results in a faster-than-expected pace of normalisation there.

“This will, to a greater extent, influence the direction of fund flows and investors’ risk appetite [in equities],” he says.

But currently, inflation is not a major worry for the Malaysian economy.

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