KUALA LUMPUR: Bank Negara Malaysia (BNM) has projected that headline inflation may rise to between 3% and 4% this year, compared with 2.1% in 2016, underpinned by higher global commodity and energy prices and coupled with the impact of the ringgit’s depreciation.

However, the pass-through of these external price factors to domestic prices would be somewhat mitigated by the fact that domestic production and consumption contain relatively modest imported content, it said in its Annual Report 2016.

Hence, this cost-driven inflation is not expected to cause significant spillovers into the broader price trends in Malaysia, given stable domestic demand conditions. “Core inflation is, therefore, expected to increase modestly,” the report read.

Still, it warned that headline inflation could average higher if global oil prices were to rise more than anticipated. The International Monetary Fund, it noted, projected global oil prices to average US$55 (RM243.65) per barrel in 2017.

“The projected trajectory of domestic headline inflation will be dependent on the future trend in global oil prices which remains highly uncertain,” said BNM.

In its headline inflation forecast, it expects global oil prices to trend higher in 2017 following the decision by members of Opec and several other oil-producing countries to cut crude production to ease the global oil glut.

This will translate into higher global oil prices, which, along with the fall in the ringgit’s exchange value, will indirectly result in higher domestic retail fuel prices.

As of first quarter of 2017, the price of RON95 petrol had been higher, averaging RM2.23 per litre, drastically above the average price of RM1.76 per litre recorded in 2016, it noted.

“The increase in fuel prices from their low base, coupled with a notable share of expenditure on fuel in the consumption basket of Malaysian households, will have a noticeable effect on headline inflation for the year,” BNM said.

Besides oil, other global cost factors are also expected to put some upward pressure on domestic inflation.

While global food prices are expected to remain low due to the improved weather and supply conditions, the outlook for overall commodity prices is expected to register a modest rate of increase in 2017, underpinned by higher prices for agriculture and metal-based products.

Inflation rates of Malaysia’s major trading partners are also likely to register small positive increases, it said.

Hence, besides oil price, two other key risks to its inflation forecast is the ringgit’s depreciation, which may also have a larger pass-through effect on domestic prices. The strength of growth in both Malaysia and its trading partners could also create more upward or downward pressures on domestic inflation, it added.