KUALA LUMPUR (May 5): Malaysian consumers may see the fastest inflation in nearly two years as early as May as producers start to feel the pinch from higher energy and logistic costs, economists flagged.

Firms have been absorbing higher costs or drawing down inventory bought before the outbreak of the Iran war, but margin pressures are building up as the geopolitical tensions in the Middle East now in its third month show no signs of easing.

A sustained inflation above 2% warrants close monitoring as firms exhaust their cheaper inputs and begin raising prices, economists said, even as Malaysia does not have an inflation targeting policy.

“Malaysia’s economy is about 60% consumption, so this transmission of a supply shock to the demand side is something to watch out for,” Dr Nungsari Ahmad Radhi, an economist and chair of the Khazanah Research Institute, told The Edge.

Businesses can only absorb rising costs to a certain extent before passing them on, he said.

Concerns over inflation are mounting as factory-gate prices rose for the first time in a year amid a surge of crude oil, water and electricity in March.

The producer price index, which tracks inflation at the wholesale level before it reaches consumers, increased 1% year-on-year in March. When compared to February, the index climbed 4.1%, the biggest month-on-month rise in more than two decades.

Costs of everything from urea used as fertiliser in agriculture to diesel used in farm equipment have remained elevated as the US blockaded the Strait of Hormuz, a critical waterway for global flow of goods ranging from oil to metals.

“Inflation trajectory for Malaysia remains highly unpredictable,” said Sunway University professor of economics Dr Yeah Kim Leng. However, inflation could spike to 3% and beyond the 1.5-2.5% projected by Bank Negara Malaysia, as the current crisis prolongs, he flagged.

For now, firms may refrain from raising prices sharply as weak domestic demand, particularly in private consumption, could constrain the extent of increases, he noted.

Both Nungsari and Yeah are among the members of the National Economic Action Council, acting as the advisers in the Policy Advisory Committee to the Prime Minister.

Historical trends suggest that price pass-through typically occurs within two to four months after initial shocks, pointing to a potential acceleration in consumer inflation between May and July, said Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

Data out earlier on consumer prices — the preferred gauge of inflation for the government and the central bank — have only picked up slightly to 1.7% in March, thanks to a system of subsidies and price control on essential goods and services.

Core inflation, a measure of underlying inflation which strips out volatile prices of items such as fresh food as well as administered prices of goods, has risen to 2.1% in March. 

“Government intervention to lower fuel costs for vulnerable sectors, particularly food production, essential services and transport, is important to reduce knock-on effects on consumer prices while protecting jobs and small businesses,” said Yeah.

However, fuel subsidies alone consume some RM7 billion each month, about 10 times higher than the pre-war levels, putting a strain on government coffers. “The government has done a lot to the point of it being unsustainable fiscally,” Nungsari remarked.