2017 Inflation Rate Manageable, Say Economists

By Niam Seet Wei and Sharifah Pirdaus Syed Ali KUALA LUMPUR, Dec 29 (Bernama) -- The nation's 2017 expected inflation rate of between 2.5 and 2.8 per cent as measured by the Consumer Price Index (CPI), is modest and manageable, say economists. MIDF Investment Chief Economist, Dr Kamaruddin Mohd Nor, said the inflation rate, expected to be higher next year, has averaged 3.63 per cent from 1973 to 2016. "It hit an all-time high of 23.90 per cent in March 1974 and a record low of -2.40 per cent in July of 2009," he told Bernama. He said the inflation rate this year remained modest at 2.2 per cent year-to-date on the back of the lower pump prices as compared to last year's. Professor of Economics at Sunway University Business School, Dr Yeah Kim Leng, said most developing economies, including Malaysia, registered low and benign inflation compared to advanced economies like the US, Japan and Europe. "Developed countries are struggling to contain deflationary pressures and achieve an inflation target of two per cent," he said. Both economists believed that the higher CPI that is expected next year would be mainly driven by the increase in retail fuel prices (pump prices). Kamaruddin projected the average pump price for RON95 to be RM1.95 per litre for 2017 versus RM1.75 in 2016. "This is because crude oil prices are expected to increase to US$50 per barrel next year," he said. Yeah said the increase in fuel prices would result in increased CPI next year as it constituted about eight per cent of the components in the index's basket. "If consumers were to pay higher fuel prices, transportation costs would be higher and overall inflation rate would increase by between 0.2 and 0.3 percentage point," he said. Yeah said the possibility of several price adjustments, including prices of administered items such as cooking oil, household gas, highway tolls and electricity tariff, would also contribute to the higher inflation rate next year. Kamaruddin said the impact of the weakening ringgit would jack up imported inflation due to pricier imported items leading to a higher inflationary pressure in 2017. He hoped the government would focus on import substitution, replacing foreign imports with domestic production, especially food products. "This means, the reliability on food imports would be reduced, ensuring price stability in the short term and mitigating risks of any external shocks that will affect the prices," he said. Yeah, echoing Kamaruddin's view, said based on the composition of imported items in the CPI basket, the weaker ringgit, which depended on the extent of depreciation, may add up to half a percentage point to domestic inflation. He said the government should encourage more investments to increase production in the agricultural sector while promoting greater competition and efficiency in supply and distribution chains. "If necessary the government should consider more targeted subsidies rather than implementing general ones," he said. Both economists also believed that the impact of the Price Control and Anti-Profiteering Act 2011, which would be expiring by year-end, would be marginal. "Unscrupulous businessmen and traders may take advantage to hike up prices, but the expiry of the Act would not have severe consequences because of the modest demand, adequate supply and competitive markets, especially consumer goods markets," said Yeah. The removal of cooking oil subsidy recently would also have minimal impact as it only took-up a small proportion of total household spending, Yeah added. "The lifting of the subsidy would have an impact on the inflation rate as the price differential would be reflected on the CPI reading next year," said Kamaruddin. -- BERNAMA