PETALING JAYA: Malaysia experienced a 2% inflation rate in June, consistent with May’s rate, bringing the average inflation rate for the first half of 2024 (1H24) to 1.82%.
The consumer price index (CPI) stood at 133.0, up from 130.4 in the same month the previous year.
According to the Statistics Department, restaurant and accommodation services saw the largest year-on-year increase at 3.3%, slightly higher than May’s 3.2%, primarily due to higher costs in the beverage preparation services sub-group.
Inflation for housing, water, electricity, gas, and other fuels remained steady at 3.2%, driven mainly by the water supply and miscellaneous dwelling services subgroups.
Food and beverage prices increased by 2% in June, compared with a significant 18% in May.
The main food sub-group rose by 0.9%, up from 0.5% in the previous month.
However, the increase in the main subgroup of food away from home slowed slightly to 3.3% from 3.4% in May.
Inflation in the transport category recorded an increase of 1.2% in June 2024 as compared to May’s 0.9%.
This increase was contributed by the main sub-group of operation of personal transport equipment, which increased to 1.7% in June compared to 1.4% in May.
The expenditure class of fuels and lubricants for personal transport equipment increased to 0.9% as against 0.3% in May.
The Statistics Department noted that the increase aligned with the rise in the average price of unleaded petrol RON97, which averaged about RM3.47 per litre compared with RM3.37 in the corresponding month last year, and diesel in Peninsular Malaysia, which rose to RM2.99 per litre from RM2.15 per litre in June 2023.
To note, starting June 10, the retail price of diesel for Peninsular Malaysia was set at RM3.35 per litre compared with RM2.15 per litre, while the retail price of diesel in Sabah, Sarawak and Wilayah Persekutuan Labuan remained at RM2.15 per litre.
Following the implementation of diesel subsidy rationalisation, concerns about inflation have surged, particularly regarding its potential impact on transportation costs and broader consumer prices.
Economists, however, opined that while the subsidy rationalisation may exert some upward pressure on inflation, its overall impact will be moderated by targeted measures and continued support for key sectors.
They argued that effective management and strategic interventions will be crucial in stabilising the economy and ensuring that the long-term benefits of the subsidy reforms outweigh any immediate challenges.
Economist Geoffrey Williams emphasised that most companies eligible for subsidised diesel would continue to pay the old price, thus mitigating any significant increase in costs.
“People must be vigilant to make sure companies are not using subsidy rationalisation as an excuse to raise prices,” he added.
Meanwhile, UCSI University Malaysia associate professor of finance Liew Chee Yoong said the subsidy rationalisation programme for diesel is likely to create upward pressure on prices, particularly in 2H24, potentially pushing inflation to between 2% and 3.5% for the year.
For perspective, if the country were to achieve a full-year inflation rate of 2.8%, the CPI in 2H24 would need to average about 3.78%, over double its average in 1H24.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said while the direct impact on the CPI might be minimal – since diesel represents only 0.2% of the total CPI – “the risks of higher inflation are not negligible.”
He noted that business pricing behaviours could influence the overall inflation outlook.
Sellers might raise prices and attribute it to the diesel price hike, leveraging the subsidy changes to justify increased costs, thereby echoing the pricing concerns voiced by Williams, although the actual impact on CPI is relatively small.
Inflation in June 2024 was influenced by a 3.3% and 3.2% year-on-year increase in both the restaurant and accommodation services, as well as housing, utilities, gas, and other fuels categories, respectively.
When asked if the trends are likely to persist, Mohd Afzanizam said: “I believe so. Adjustment on the services tax rate from 6% to 8%, electricity subsidy rationalisation, as well as water tariff adjustment, has resulted in an upward increase in these prices.”
However, he said measures such as higher cash transfer programmes like Rahmah Cash Aid and Sumbangan Asas Rahmah for poor households, along with targeted subsidies, are expected to minimise the impact.
“Not to mention the Employees Provident Fund (EPF) Flexible Account withdrawals would also help to mitigate the impact among EPF members from higher cost of living,” he added.
Similarly, Liew said the trends observed in June 2024, where inflation rose by 2% year-on-year, are likely to persist.
“These sectors continue to experience demand pressures and cost-push inflation due to higher utility and energy prices. If these trends continue, the broader economy could face challenges such as reduced consumer purchasing power and increased costs for businesses, potentially slowing economic growth,” he added.
Conversely, Williams said the increase in utility prices would gradually taper off, but warned that sectors like hotel restaurants and food outlets are “notorious for passing on costs to customers,” which could influence overall price levels.
However, overall, Williams acknowledged that inflation is being handled well by Bank Negara and hence, he expects it to hover around or below historical levels of between 1.9% and 2% for the year.
Liew, on the other hand, said Malaysia’s current inflation levels, hovering around 1.8% to 3%, depending on the sector, suggest a stable yet cautious economic environment.
To better manage inflation and support economic stability, he suggested implementing measures such as targeted subsidies for essential goods, boosting support for local food production to reduce reliance on imports, and enhancing energy efficiency programmes to mitigate utility cost increases.
“Additionally, maintaining a balanced fiscal policy that does not overly strain public finances while providing necessary economic support will be crucial,” he added.
Mohd Afzanizam, meanwhile, said the projected inflation rate of between 2% and 3.5% for 2024 reflects the degree of uncertainty in respect of the policy changes and the impact on overall inflation.
“It is safe to say that the balance of risks for inflation is tilted to the upside. While this affects consumer and business sentiments, these measures (subsidy rationalisation and higher taxes) are necessary to improve the government finances which can be redirected towards economic development such as education, healthcare, and infrastructure,” he said.
Source: https://www.thestar.com.my/business/business-news/2024/07/25/impact-of-diesel-subsidy-removal-manageable