Recent price hikes incur significant impacts on domestic inflation
WIDE DISPARITY: KPDNKK Minister, Datuk Seri Ismail Sabri Yaakob examines the price of petrol and diesel at a station in Kampung Segaliud near Sandakan in Sabah in this file photo. The ministry, alongwith PEMANDU, have noted the significant disparity in fuel prices within Southeast Asia — deeming such a high degree of price distortion as ‘unsustainable’. — Bernama photo
KUCHING: The reduction of fuel subsidies, amongst others, would certainly have an impact on domestic inflation, according to economists at the RAM Economic Research (RAM).
Citing the early January price hikes for RON97 petrol and kerosene as their examples, the economists pointed out that as fuel represented a substantial portion of consumer’s budget, it remained vital to reiterate the need to reduce cross-border price distortions particularly amongst neighbouring economies.
“While the reduction of subsidies will promote greater spending efficiency on the part of the government and assist in reducing the fiscal deficit, it should be noted that the ‘decades-long’ subsidy programme has artificially depressed the domestic cost of living relative to Malaysia’s neighbours,” said Jason Fong, one of the economists, in RAM’s ‘Economic Monitor-January 2011’ report.
This, in turn, had continuously sent out diminished price signals in the form of nominal wages, according to Fong.
“This may have contributed to the loss of skilled labour over the years as a result. Although the subsidy-rationalisation programme should continue, a clear timetable should be made available to the public.
“This is to reduce the impact of sudden price adjustments, which may accelerate any secondary or tertiary impact of prices – particularly on other consumer items.”
The current subsidy-rationalisation programme is co-managed by the Ministry of Domestic Trade, Consumerism and Co-operatives (KPDNKK) together with the government-endorsed Performance Management and Delivery Unit (PEMANDU). Recently, both agencies noted the significant disparity in fuel prices within Southeast Asia, and that such a high degree of price distortion was deemed ‘unsustainable’.
Thus, a reduction of these subsidies had enabled additional funding for government spending – primarily on the rural sector.
“For all intents and purposes, the upward price adjustments in December 2010 have been structured the same way as the July price revision – the same degree of increases for a similar range of goods, and the same abruptness in the announcement,” observed Fong.
Through it all, food products contributed the most to upward price pressures, accounting for one percentage point of the overall two per cent average inflation during the period. In other words, increases in food prices had accounted for half of the total rise in inflation.
“With this in mind, inflation in December is expected to increase slightly, compared to its previous trend of 1.9 per cent to 2.1 per cent. Current nominal wage growth has exceeded inflation, particularly in an environment of low unemployment while the savings rate has been on the rise, in line with the uptrend in interest rates.”
Positively still, there appeared to be no shortage in food and fuel supplies domestically, to which Fong indicated that hoarding had yet to cause any abnormal spike in prices since the first round of price adjustments.
“While hoarding of goods does certainly occur on occasion, the level seems controlled. Moreover, increases in nominal wages have not yet sparked a domestic wage-price spiral in the past six months, despite the national tendency to adjust wages at the end of the year – indicative of the economy’s sufficient ability to absorb the first round of price hikes,” explained Fong.
Adding to this, prices of non-food as well as non-fuel consumer items – apart from tobacco – had not experienced any substantial increases either, suggesting limited transmission of prices to other consumer items, the economist concluded.