MALAYSIA is projected to record a higher inflation of 3.8% this year as compared to 2.1% in 2016.
This is primarily attributed to a weak ringgit and rising transportation related cost. The inflationary pressure is also expected due to the upward pressure on most prices as seen in the first half of this year, 2017.
The overall consumer price index rose by 3.6% in June 2017 compared with 3.5% in May. Among the major groups that recorded an increase are transport (+10.5%), restaurant and hotels (+4.5%) and housing, water, electricity, gas and other fuels (+2.2%).
Referring to the Malaysian Institute of Economic Research (MIER) recent economic announcement, it is important for the country to take caution due to the significant projected inflation rate as it is coupled with depreciation of ringgit and volatility in crude oil (which is trending downwards). It is crucial to understand that since Malaysia is a net importer of petroleum products, the country and consumer will end up paying more due to the weaker performance of the ringgit.
Shrinkflation on the other hand, highly impacts consumers regardless of their economic status (low, middle or high class consumers).
It is a situation where items are shrinking in size and quantity, while their prices remain the same or increase. Given the higher inflation predicted, greater shrinkflation could be expected in the future.
The government was trying to be rational in 2013 by cutting off subsidies on fuel, cooking oil, electricity and other items to support affordable housing agenda; however, it is still suggested for the government to revisit the importance of such rationalisation. It is critical for the government to take proactive measures to curb inflation and the unrealized shrinkflation that almost 90% of the household suffers.
Although the country recorded higher gross domestic product growth in the first quarter of this year — at 5.6% — it does not indicate a healthy economic behavior given a high debt and low saving pattern. Malaysian households are at risk mainly due to high consumerism sentiment.
Malaysians should be encouraged to increase savings and reduce unnecessary spending. As the ringgit movement is not convincing, given the predicted average at RM4.30 to a US dollar, we could expect volatility in the exchange rate market.
On the other hand, the banking industry might want to reduce its exposure from transport, restaurants and hotels, housing, water, electricity, gas and other fuels as inflation do affect the repayment ability of a bank’s borrowers from the respective sectors.
The estimated increase in inflation rate might reduce a bank’s expectation of repayment from the impacted borrowers.
Hence, due to the external risk factor, it is important for the business team of a bank to emphasise on the project viability by taking into account the projected inflation rate in suggesting an appropriate financing product.
Additionally, credit evaluators should take into consideration the projected inflation when evaluating borrowers from the respective sectors.
Although inflation might not be seen as a crucial indicator in the financial market, research suggests that inflation creates a major problem when analysing stock market returns over a long period of time.
Almost every country in the world suffered their worst stock market decline, as measured in real values, during a period of high inflation or hyperinflation as stocks and the other financial assets failed to keep up with the increases in the price of goods.
Furthermore, inflation also creates extreme volatility in stock market return. If the government lacks the power to resolve the inflation, the stock will collapse in value. Stocks can lose over 95% of their real value.
History has shown that in periods of inflation, dividends are rarely able to keep up with the increase in consumer prices and dividend decline in real terms, further reducing investor total return.
Inflation might not be seen as an alarming indicator in the Malaysian economy due to its single low digit but it has been proven that even a small increase in the inflation can result in a very high impact to the economy.
Sharifa Azzahra is a freelance risk analyst and contributor to Malay Mail Money. This article first appeared in Malay Mail Money print version!