[Economics] Inflation in Malaysia

  2009-2013 historical annual inflation rate

  Source: The World Bank

Inflation is a sustained increase in the cost of living or the average price level leading to a fall in the purchasing power of money. Based on the data above, Malaysia had successfully maintained low inflation rate over the 5 years compared to comparable countries in Asia. According to Bank Negara Malaysia data, the country's inflation barometer which is the Consumer Price Index (CPI) started moving up to 3.2% YoY in May 2014 compared to 2.1% in 2013. The government’s efforts to cut budget deficit and subsidy rationalisation has led to price pressure and cost-pushed inflation. Cost-push inflation arises when businesses increase prices to maintain or protect profit margins after experiencing a rise in their costs of production. 

Causes of Malaysia inflation (May 2014)

Contribution factors to changes in CPI

   Annual % price changes in the main groups of the CPI sorted from high to low (May 2014)
  (Source: Department of Statistics Malaysia)

• The 3.2% increase YoY (May 2014) in the CPI was brought about by increases in the overall CPI of all the main groups except for Clothing and Footwear, Semi-Durable Goods, Communication and Durable Goods.
• Alcoholic beverages & tobacco price rose the highest by 14.1% YoY was in line with the higher sin tax announced in Budget 2014 i.e 14% cigarette hike in excise duty. 
• Apart from that, price of the main groups that rose above 4% YoY arre Transport, Restaurant & Hotel and Non-durable goods. 

Fuel hike

• Foremost, RON95 petrol and diesel prices were raised by 10.5% and 11.1% respectively, from September 2013. Fuel prices were last hiked in July and December 2010, by a total 5.7%. 
• In addition, there is a 20 sen price increase for RON97 petrol to RM2.90/litre effective Mar 2014. 
• The fuel-price hikes had spillover effects on other goods and services, with some business operators already passing on their increased costs to consumers. This translates into transport price inflation to rise by 5.5% YoY in May 2014 .

Raise in electricity tariff

• Further to that, the government announced that effective from January 2014, the average electricity tariff in Peninsular Malaysia will be increased by 4.99 sen/kWh or 14.9% from the current average of 33.54 sen/kWh to 38.53 sen/kWh. 
• The hike in tariff is based on four components, which includes the pass-through of costs for three fuels which are natural gas, liquefied natural gas (LNG), and coal. 
• The other component included in the tariff hike is the base tariff. Approximately 68% or 3.41 sen/kWh of the 4.99 sen/kWh hike is attributed to the price of imported LNG which is fixed at RM41.68/MMBtu. 

Increase in food price

• Sugar is a controlled commodity in Malaysia. In 2014 Budget, the Government said it would stop subsidising sugar by 34 sen/kg. 
• The existing price of sugar is RM2.50 per kg has raised to RM2.84. The move has caused cascading price hikes as shops are going to increase the price of drinks by at least 10 sen per glass. 
• Also, food price inflation is expected to remain elevated due to festive demand, bad weather, ringgit weakness and spillover effects from previous price hikes.  
• To compound that, the minimum wage rate of RM900 was implemented in 2013. 

Property price

• Additional costs incurred to developers will be pass on to the property buyers due to increasing labour costs, utility bills, raw material costs and transportation costs. 
• However, property price is expected to increase at a slower space as property cooling measure in place to curb speculation and excessive price growth. 

Inflation creates winners and losers, knowing who win and lose will allow you to make sound investment decision.

(Sources: The World Bank, Bank Negara Malaysia, Department of Statistics Malysia, The Star, The Edge)