KUALA LUMPUR (March 30): Bank Negara Malaysia (BNM) forecast that the country’s headline inflation should remain manageable in 2022, averaging between 2.2% and 3.2%, amid higher underlying inflation of between 2% and 3% that will be driven by improving demand conditions and lingering cost pressures.

Fuel inflation, which underpinned higher headline inflation in 2021, is projected to moderate in 2022, it said — despite expectations of higher global oil prices — given the assumption that the price ceiling on domestic retail fuel prices would remain in place throughout the year.

"Of note, for the second half of 2022, the base effect from electricity prices is projected to contribute to a temporary spike in headline inflation, particularly in the third quarter of 2022," it said in its 2021 Economic and Monetary Review report released on Wednesday (March 30).

It expects price pressures in 2022 for most items in the core Consumer Price Index (CPI) basket to largely reflect a normalisation after a period of subdued demand and reduced profit margins during the Covid-19 pandemic. “However, prices for some CPI segments, such as food away from home and some high-touch services, are projected to exceed their pre-pandemic trend due to the confluence of stronger demand and the high-cost environment,” BNM said.

While it expects upward adjustments to the underlying or core inflation to remain partly contained by continued slack in the economy and labour market, it warned that the overall inflation outlook remains susceptible to upside risks, particularly from cost-push factors. 

"These include a more persistent uptrend in input costs due to higher global commodity prices and prolonged disruptions to global supply chains, which could be exacerbated by geopolitical tensions and lockdowns in China. Higher input costs could also induce pass-through of costs to consumer prices should businesses expect them to be more permanent in nature,” said BNM.

There is also the risk that excessively high global energy prices could lead to adjustments to domestic retail fuel prices that had remained unchanged since March 2021, it said.

On the other hand, factors that could lead to a weaker economic recovery could result in more benign price pressures.

"These include larger slack in the domestic economy due to weaker-than-expected demand conditions and labour market recovery, as well as external risks which could derail Malaysia’s growth and trade outlook, such as the emergence of severe and vaccine-resistant variants of concern,” BNM added.

Read more stories from the BNM Annual Report 2021 here.