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Thursday, January 23, 2014

Malaysia inflation jumps as government feels heat over living costs

JANUARY 22, 2014
A seafood stall keeper returns change to a customer at a market
in Kuala Lumpur August 27, 2013. — Reuters pic
KUALA LUMPUR, Jan 22 — Malaysia’s inflation rate jumped in December, exacerbating a political headache for the government over rising living costs and increasing the chances of an early hike in interest rates this year that could further dampen consumer sentiment.

The statistics department said today that the consumer price index rose to 3.2 per cent from 2.9 per cent in November, the highest level since November 2011 and up from 1.2 per cent a year earlier. A Reuters poll had forecast it would pick up to 3.1 per cent.

Faster price rises are partly a result of a series of subsidy cuts introduced by Prime Minister Najib Razak’s government last year that have eased concerns over the Southeast Asian nation’s high debt burden and fiscal deficit.

The measures triggered a 10 per cent rise in petrol pump prices and a 15 per cent hike in power tariffs that are filtering through to prices of other staples such as vegetables and meat.

Faster inflation is likely to prompt the central bank to raise its benchmark rate from 3 per cent this year, the first change since mid-2011. Economists are expecting a hike of between 25 and 50 basis points.

A weakening ringgit currency, which is down 1.5 per cent since the start of the year and at five-month lows against the dollar, could add to upward pressure on prices through more expensive imports, and reinforce the case for raising interest rates.

Those inflationary pressures, combined with high levels of household debt, soaring property prices and, by comparison, relatively weak wage growth could leave Najib vulnerable to criticism from rival factions within his own party — the United Malays National Organisation (UMNO).

There is festering discontent with Najib among conservatives in UMNO after its multi-ethnic Barisan Nasional coalition only narrowly scraped an election victory last May.Still, most economists expect Malaysia’s economy to grow at a robust 5 per cent or more this year, following an expected 4.5-5.0 per cent growth last year, helped by a brighter global economy that should fuel its vital export sector.

Najib was widely ridiculed in online media in recent weeks for saying that
the price of local vegetable kangkung (water spinach) had fallen, despite price
rises for most other goods. — Picture by Choo Choy May
The pinch

But an outcry by consumers and the political opposition over the price jumps has stung the government and could lead Najib to consider delaying some further belt-tightening plans, analysts say. Najib was widely ridiculed in online media in recent weeks for saying that the price of local vegetable kangkung (water spinach) had fallen, despite price rises for most other goods.

Food and transport prices were among those that rose fastest in December from a year earlier, gaining 4.5 per cent and 5.0 per cent respectively.

The government last week set up a special cabinet committee to tackle the cost of living and has dispatched ministers to visit local markets to warn against price gouging.

Rahul Bajoria, an economist at Barclays Capital in Singapore, said the government could delay plans for road toll hikes and increase cash handouts for poorer Malaysians, but was unlikely to backtrack on its main fiscal tightening steps.

“The fiscal situation needs to be controlled,” he said. “The government is in the first year of its new term, I don’t think that it will really turn populist at this point.”

Two-thirds of Malaysian households earn less than 5,000 ringgit (US$1,500) per month, according to the most recent data. Consumer debt in Malaysia is the among the highest in Asia at around 83 per cent of GDP.

Surging housing prices in major urban centres like Kuala Lumpur, which aren’t reflected in inflation figures, have added to middle-class angst over the cost of living.

“The property market really adds to the feeling that things aren’t improving,” said Nor Zahidi Alias, chief economist at the Malaysian Rating Corporation.

Indebted consumers could take another hit this year if a weakening ringgit and higher inflation force the central bank to tighten monetary policy more than expected.

Later in the year, the government is expected to announce a further cut in fuel subsidies, followed at the beginning of 2015 by the introduction of a new consumption tax at 6 per cent.

“This year is not going to be as benign as last year,” said Nor Zahidi. “Inflation going to be a little bit hotter, especially in second half of the year.” — Reuters

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