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This article first appeared in The Edge Financial Daily on March 29, 2019

KUALA LUMPUR: The Producer Price Index (PPI) for local production dipped 1.6% year-on-year (y-o-y) in February 2019, which the Statistics Department (DoS) attributed to a decline in the agriculture, forestry and fishing segment, as well as the water supply and manufacturing components.

In a statement, DoS said agriculture, forestry and fishing segment fell 11.6%, while the water supply and manufacturing components dipped 2% and 1.3% respectively.

Meanwhile, the mining as well as electricity and gas supply indices edged up by 2.4% and 0.8% respectively.

On a monthly basis, the PPI for local production rose 0.6%, supported by the indices of mining (+4.7%), manufacturing (+0.2%) and agriculture, forestry and fishing (+0.2%). However, the index of water supply and electricity and gas supply recorded a decline of 1% and 0.3% respectively.

Year to date, the period of January to February PPI for local production dropped 2.6% from a year ago.

In a note yesterday, MIDF Research said as Malaysia’s producer cost remains deflationary, it expects the PPI to remain low for the first half of the year given that retail fuel prices of RON95 and diesel are capped at lower levels than 2018’s average prices.

“As a leading indicator of price changes at the consumer level, the latest PPI number suggests that Malaysia’s headline inflation to stay low for the first (1Q) and 2Q.

Referring to input price of food product, the component fell by 10.1% y-o-y in February. As food items hold almost the majority share in Malaysia’s Consumer Price Index (CPI), we expect headline inflation to pick up at a modest pace,” said MIDF.

Dr Anthony Dass, chief economist at Ambank Research noted that the drop in PPI is in tandem with the CPI which fell 0.4% in February, making it the second consecutive month of recorded deflation for Malaysia.

“It is also in tandem with the slowing global economy and as oil prices remain weak. With slower economic growth we will also see slower output, causing margin pressures. Furthermore, cost of production would also drop due to changes in technological use,” he told The Edge Financial Daily over the phone.

Regionally, MIDF observes that Asean countries’ PPI slid in unison.

“In February 2019, most of the PPI in emerging economies recorded contractions. Modest pickup in global commodity prices during 4Q 2018 and 1Q 2019 among others is the major factor which had led to a push down in input prices,” it said.

Nevertheless, MIDF said it foresees producer price inflation to average at 1.5% in 2019, amid low-base effects.

“We anticipate inflationary pressure from fuel-related items to pick up gradually, in tandem with modest improvement global energy prices and solid demand by developed and emerging economies,” said MIDF.

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