Wednesday, April 22, 2009

Malaysia March Inflation Report

Nothing unexpected out of today's inflation report:

But we've had negative m-o-m growth since last August:

...driven by changes in these two categories (2005=100):

While the y-o-y number is more relevant to policymakers and investors, from a psychological standpoint the m-o-m number is probably more important in defining consumer and business behaviour. We're very likely to see negative numbers in the headline y-o-y rate, simply because of the high base level of last year. But on the ground, sustained deflation would be driven by what people see on a day to day basis.

Which is why I'm as much interested in what the level of the CPI is doing rather than its changes:

An essentially flat CPI, while not as dangerous as full-fledged deflation, can have the same dampening effect on businesses and consumer spending if only to a lesser degree. With a large output gap, flat price level and very low interest rates, businesses have no pricing power and workers no leverage for income increases. This can push back recovery further into next year.

We won't have March monetary aggregate data until next week, but M2 and M3 growth are slowing down faster than I'd like. No bets on whether BNM will cut interest rates at next week's Monetary Policy Committee meeting - I think it's a question of how much rather than yes or no.

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