This article first appeared in The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020

LAST Wednesday, the Department of Statistics announced that inflation, as measured by the Consumer Price Index (CPI), had declined 1.4% year-on-year in August, marking the sixth consecutive month of negative inflation rate this year.

Economists say this prolonged period of negative inflation is here to stay, given that the drop in August’s CPI has brought the inflation rate for the first eight months of the year to -1%.

“After recovering steadily over the previous three consecutive months, the slight weakening of the CPI in August to -1.4% suggests that the negative headline inflation will take longer to turn positive, [and] that inflation will remain benign for the rest of the year in tandem with weak growth expectations,” Sunway University Business School economics professor Dr Yeah Kim Leng.

He adds that the softening economic outlook is attributed to the difficulties many countries are facing in containing the Covid-19 pandemic and the threat of a second wave.

“With the headline CPI at -1% in the first eight months and a more gradual inflation trajectory, Malaysia’s full-year CPI is projected at -0.8%.

“For 2021, the headline CPI is forecasted at 1.2% in line with a gradual pick-up in prices amid firmer national and global growth prospects,” he tells The Edge.

Affin Hwang Investment Bank Bhd chief economist and head of research Alan Tan echoes that sentiment. He sees full-year inflation coming in at -0.7% for 2020.

“I believe the market was expecting inflation to go from negative territory to positive territory as a reflection [of the fact] that we are out of deflation. But so far, with global oil prices remaining relatively stable and flat, domestic retail petrol prices are unlikely to trend higher from here.

“That is one of the reasons why we believe the headline inflation rate will be in negative territory, possibly up until September and October. Things could turn slightly positive in November and December because of the year-end festive season, which could see better consumption spending.

“For the full year, we are forecasting an inflation rate of -0.7%. Outside the cost of transport, we don’t see inflation picking up sharply for food items, or even for some of the major items like housing, water, electricity and gas. For electricity, there is still the rebate, and we think that will continue to push down utility prices as well,” he says.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid says that core CPI — which is the inflation rate sans food and energy prices — remained positive at 1.2% for the first eight months of this year versus 1% in the same period last year.

“Therefore, it is not a deflation in the true sense as prices in other parts of the CPI components have been recording positive growth. As such, we are projecting CPI to decline by 0.5% in 2020,” he says.

Although deflation generally refers to an across-the-board collapse in prices, some components of the CPI basket saw an increase — albeit a slight one.

Among the major CPI groups that saw a y-o-y increase in prices in August were miscellaneous goods and services, which increased 3.1%, communication services (up 1.6%), and healthcare and education (both up 1.1%).

Transportation costs saw the largest decline at close to 10% owing to the drop in RON95 petrol prices to RM1.68 per litre in August compared with RM2.08 per litre last year, while food prices increased 1.3%.

Among the food index subgroups that saw a significant increase in prices was vegetables, which rose 5%. Goods that saw the highest price growth in most states were small onions (19.9%), ginger (19.3%) and big onions (18.4%).

“Food prices, especially vegetables, which rose by 5% in August, continue to remain high due to lower farm production caused by labour shortages, import supply disruptions and other seasonal factors.

“Food prices are expected to remain ­elevated due to measures taken to contain cross-border virus transmission and restrict the import of foreign workers,” says Sunway’s Yeah.

Bank Islam’s Afzanizam says the diverging trend between the headline inflation number and food prices is expected to widen.

“If you look at the self-sufficiency ratio as of 2019 for certain food products, they are less than 100%: cabbage at 36.2%, chillies at 30.8%, beef at 23.7% and fresh milk at 59.3% [among others].

“This would mean our reliance on food imports is quite prevalent. Therefore, a weak ringgit would exacerbate the rise in prices,” he explains.

Afzanizam adds that profiteering and malpractice among irresponsible businesses could lead to higher price increases in food items.

“Therefore, one would need to be mindful of this dynamic before making a conclusion about the state of inflation and the cost of living,” he says.

Affin Hwang’s Tan points out, however, that even though the prices of vegetables have risen by 5%, it is not across the board for the subgroups in the food index.

“While the prices of vegetables have gone up, this is being offset by pretty stable food prices [of other subgroups] such as seafood and meat. No doubt food prices account for close to 30% of the CPI basket, so if we are to see an across-the-board increase in food prices [in most of the subgroups], we could see inflation picking up, but this will likely be towards year-end, during the festive season,” he says.

On the same day the August inflation numbers were released, Prime Minister Tan Sri Muhyiddin Yassin announced the KitaPrihatin package targeted at the B40 and M40 group. This is a RM10 billion supplementary initiative package that comprises RM7 billion in cash handouts under the Bantuan Prihatin Nasional 2.0 (BPN2.0), RM2.4 billion Wage Subsidy Programme 2.0 and RM600 million Prihatin Special Grant (GKP).

On whether cash handouts such as the BPN2.0 will help spur consumer demand and hence result in an increase in the price index, Afzanizam says demand in general is still soft, especially as the blanket loan moratorium is ending this month.

“While KitaPrihatin will help to ease the financial burden of the B40 and M40 as well as the businesses in the small to medium and micro-enterprise space, it would not be strong enough to lift general prices. The purpose of the stimulus is to stabilise the economy and to facilitate the recovery process,” he adds.

Kenanga Research said in a note last Thursday that prices would gain support from the injection of additional stimulus measures targeted at bolstering the domestic demand from the B40, M40, employees and small and medium enterprises.

“However, deflation will likely remain till year end amid surging unemployment, limited upside to crude oil price and lingering Covid-19 fears,” the firm states.

Malaysia’s unemployment rate eased to 4.7% from 4.9% in June and 5.3% in May, its highest level in over three decades. Meanwhile, Brent crude oil futures were trading at US$42 per barrel at press time, more than double its price at end-April when most countries were still in lockdown owing to Covid-19 but still significantly lower compared to its trading price of US$62 per barrel last year.

Most economists are of the view that Bank Negara Malaysia is likely done with its overnight policy rate (OPR) rate cuts this year, and the negative inflation pattern so far affirms this.

“Though we are seeing negative inflation, we think that current macroeconomic indicators are pointing to some recovery, and as such, we don’t think the central bank will cut the policy rate,” says Affin’s Tan.

Bank Negara will meet for its final Monetary Policy Committee meeting for the year in November. The central bank has so far slashed the OPR by 125 basis points to 1.75%, the lowest level since the OPR framework was introduced in 2004.

Kenanga Research also expects the central bank to hold the OPR at 1.75%.

“Barring a second wave of Covid-19 infections nationwide and a reinstatement of lockdown measures, Bank Negara is expected to keep the OPR unchanged at 1.75% for the rest of 2020, in line with the relatively upbeat tone derived from its latest monetary policy statement,” it says.

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