KUALA LUMPUR (Aug 4): Businesses are expected to pass on higher operating costs to consumers in the coming months, pushing Malaysia's headline inflation to trend higher this year, according to the Socio-Economic Research Centre (SERC).

Producer prices have been rising over the past few months, and persistent cost pressures that are likely to feed through to consumer prices, SERC executive director Lee Heng Guie said.

“The underlying price pressure remains very high; costs of doing business also continue to go higher and that definitely will pass through," Lee told a briefing.

He said higher energy prices have increased production and transportation costs across the supply chain, together with rising raw materials costs. These increases are actively forcing producers to pass operational friction directly to consumers.

Hence, Lee expects Malaysia's headline inflation to average between 2.5% and 2.8% this year, exceeding Bank Negara Malaysia's (BNM) projection of 1.5-2.5%. In 2025, the headline inflation rate stood at 1.4%, moderating from 1.8% in the previous year.  

Further, inflation could face upside risks if a "super" El Niño materialises later this year, disrupting agricultural production and pushing up food prices, Lee said.

The producer price index, which measures inflation at the wholesale level before it reaches consumers, rose 9.2% year-on-year in June, accelerating from 7.8% in May. The increase was driven by a 29% jump in the mining sector, while producer prices in the manufacturing sector rose 7.2%.

The increase extended an upward trend after producer prices rose 5.4% in April and 1.1% in March, reversing contractions of 3.4% in February and 2.9% in January.

The cost increases comes on the heels of rising consumer price index, which rose as much as 2% year-on-year in May — its fastest pace in two years — due to rising transportation and food prices. The headline inflation eased slightly to 1.9% in June on pullback in fuel prices.

Meanwhile, Lee anticipates the ringgit strength to remain at current levels by year end although temporary weakness could emerge amid "heightened election cycles or shifting political dynamics".

"In the near-term, domestic political headlines, including speculation surrounding upcoming state polls, potential early GE16 calls, and the fiscal deficit management may create short-term market uncertainty and influencing the ringgit. We estimate end-2026 ringgit to trade between RM4.00-4.10 against the US dollar," Lee said. 

Against the backdrop of geopolitical uncertainties, Malaysia's ongoing election cycle has seen a change in state goverment in Negeri Sembilan, with Melaka the next state to go to the polls in the coming months.

"Political risk premiums directly shape the economy by driving market uncertainty, altering investment flows, policy shifts and shifting sentiments, forcing investors to turn cautious. Political instability concerns create doubt, causing businesses to delay investments," Lee said. 

Despite the higher inflation outlook, SERC raised Malaysia's 2026 gross domestic product (GDP) growth forecast to 5-5.2%, from its previous projection of 4-4.5%, underpinned by stronger-than-expected first-half economic performance and robust exports, particularly of electrical and electronics (E&E) products.

The revised forecast is above the Ministry of Finance's and BNM's official GDP growth projection of 4-5% for 2026. Malaysia's economy expanded 5.2% in 2025 after growing 5.1% in 2024.

Lee said SERC had sharply raised its gross exports growth forecast to 25.6% from 4.5% previously after exports surged 27.5% in the first half of the year, driven mainly by stronger demand for E&E products amid front-loading activities. E&E exports rose 42.5% during the January-June period.

The upward revision also reflected Malaysia's stronger-than-expected economic performance, with advance estimates showing GDP growth accelerated to 5.8% y-o-y in the second quarter from 5.4% in the first quarter, lifting first-half growth to 5.6%.

However, Malaysia is showing signs of a "K-shaped economy", pointing to growth driven largely by E&E sectors while traditional retail, small businesses and low-skilled workers lagged.

Growth could moderate in the second half of the year as the boost from front-loading of exports, restocking activities and inventory accumulation normalises. He added that growth would also be affected by a higher base of comparison from the second half of last year.

The outlook remains subject geopolitical tensions in West Asia, that could keep further impact oil prices and supply chains, escalating US trade measures, a potential "super" El Niño, heightened global financial market volatility, he said.