MIDF Research projected that successful vaccine rollout in the country would likely improve sentiments and encourage spending. — Bernama photo
KUCHING: Inflationary pressures are expected to increase this year, with analysts also projecting that over the next few months, inflation will trend upwards as the low base effect takes precedence.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) recapped that inflationary pressure is largely muted in 2020 due to weak demand, low crude oil prices especially in the first half of 2020 (1H20) and government rebates through the electricity discount bills.
“Although the electricity rebates will continue until June this year, the quantum was lower than what was given last year,” MIDF Research said.
“Generally, apart from the low base effect, inflationary pressures are expected to increase this year on the back of expansionary fiscal and monetary policies, higher commodity prices and returning demand as economy recovers.”
MIDF Research projected that successful vaccine rollout in the country would likely improve sentiments and encourage spending.
“Consumers may start to spend on discretionary items on better income prospects. Blanket withdrawal of i-Sinar could pave way for unaffected or less affected contributors to increase their discretionary spending.
“Furthermore, there are some pro-consumption goodies in the latest Pemerkasa such as one-off RM500 assistance for the Bottom 40 per cent (B40) group who have lost their income and increase in allocation for eBelia e-wallet program and Bantuan Prihatin Rakyat (BPR).”
In addition, MIDF Research anticipated that Brent prices will continue to hover between US$58 to US$65 per barrel (pb) at least in the 1H21 due to the Organization of the Petroleum Exporting Countries and allies (OPEC+) alliance decision to maintain its current production cut through May 2021.
Hence, the research arm foresees inflation to average at 2.3 per cent year on year (y-o-y) for this year.
Meanwhile, in a separate report, RHB Investment Bank Bhd’s research team (RHB Investment) highlighted that inflation over the next few months will trend upwards as the low base effect takes precedence.
The research firm anticipated that for the month of April and May this year, inflation could reach as high as four per cent to 4.5 per cent y-o-y, before coming down to 3.3 per cent in 2H21.
According to RHB Investment, the low base effect is due to the changes in domestic fuel prices.
“Last year, pump prices were cut to as low as RM1.25 per litre in April and hovered at that level for a couple of months before gradually picking back up.
“Given the nature of the y-o-y calculation, impact is seen in March 2021 and will continue roughly until the end of this year,” the research firm said. That said, the government’s fixing of the domestic fuel prices unlikely to alter RHB Investment’s forecast trajectory.
“In fact, it helps to remove the price uncertainty. For information, the government decided to peg RON95 and Diesel at RM2.05 per litre and RM2.15 per litre respectively starting in March 2020.
“While this mitigates a major source of price pressures, the secondary effects from the increase of other commodity prices as well as imported goods could still cause a rise in prices.
“However, we expect this impact to be small and likely absorbed by retailers.”
Looking ahead, while demand-pull pressures are expected to be weak, RHB Investment saw two elements at play in the near term.
“First, the recently implemented i-Sinar programme to a total of RM53 billion this year is expected to lead to a strong retail sales.
“This could further extend the rise in the capacity utilisation which has already recorded a strong rebound at 80 per cent on average in the fourth quarter of 2020 (4Q20). With the indicative supply pressure, prices may have an upside.
“However, the ongoing labour market slack, especially with the still-high unemployment rate could mean that wage pressures remain low and thus spending will be muted.
“On balance, without consistent wage growth and increase in income, we feel that the price impact from the programme could be limited.
“Second, the upcoming of the fourth wave of infections and the likelihood of another round of restrictive measures could be an added factor for a weak wage growth.
“We see the constant disruption to the pace of economic recovery to keep consumer spending weak and this will reflect on softer prices.”
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