KUALA LUMPUR (March 20): Headline and core inflation may stay moderate this year amid stable demand conditions and contained price pressures, Bank Negara Malaysia (BNM) said while flagging upside risks.

The consumer price index (CPI), Malaysia’s main gauge of inflation, is expected to rise 2%-3.5% in 2024 from 2.5% in 2023, the central bank said in its Economic and Monetary Review 2023 report released on Wednesday.

Core CPI, which measures domestic-driven inflation by excluding volatile items and other price-administered items, will come in at 2%-3% against the 3% average in 2023, BNM said. That is still above its long-term average amid expanding domestic demand and further expected increases in wages, it noted.

“The outlook for inflation remains highly subject to upside risks from both domestic policy factors and external forces,” the central bank said, noting that the wider forecast range has taken into account potential upside from the implementation of fuel subsidy rationalisation.

Malaysia plans to withdraw subsidies for fuel and other non-essential items widely panned by economists for being wasteful, as part of a broader effort to fix government finances. To soften the impact on cost of living, the government has pledged to dish out cash and other assistance.

The government has scrapped subsidies for sugar while raising electricity tariffs for heavy users and most recently, announced new duty on luxury goods and expanded tax to cover more services sectors.

Tax changes and higher utility tariffs that have either taken effect or are scheduled to take place in 2024 are expected to have a “marginal impact” on headline inflation, BNM said. The central bank expects the direct impact to be “minimal” as the affected items account for a small share of the CPI basket.

While the subsidy rationalisation may have short-term impact on growth and inflation, “well-planned and well-executed implementation strategies alongside targeted cash assistance can help mitigate these effects”, it said, stressing that the impact will depend on the timing and magnitude.

The direct impact on headline inflation will dissipate within a year, but there are upside risks from “knock-on effects and wage-price dynamics”, the central bank cautioned.

Meanwhile, firms will enjoy lower production cost pressures from the easing of global supply conditions as broader pressures from higher commodity prices have largely dissipated with prices expected to moderate further, BNM said.

“This would likely lead to more gradual cost pass-through, thus keeping domestic production costs contained,” BNM said. Further, the impact of exchange rate depreciation on inflation would be “manageable” as it will be partly limited by administered prices and relatively stable firm pricing, it said.

Don't miss the other highlights of the BNM Annual Report 2023. Read the articles here.