June 2010 CPI: Prices Still Under Trend

June’s Consumer Price Index report shows inflation slowly picking up (log annual and monthly changes;2000=100;click for a bigger pic):

Note that I’m incorporating my pain index now as part of the coverage (see details on this index in my post on May CPI).

It's easy to see that the uptick in June inflation is almost solely coming from the “pain” components – food and transport. Breaking it down, it’s actually coming almost entirely from increases in food prices (2.6% y-o-y). You’ll probably see that rebalance out for this month (July) as the petrol price increases start feeding through, but the effect should be minor.

There’s hardly any reason here for policy action on the monetary front, as the implied inflation rate is still far below BNM’s comfort level. The hikes in the OPR have mainly been about reining in asset prices, though I’m doubtful the policy stance will have much impact on those  -we’re hardly touching the brakes here. The prospective glacial pace of the government’s abolishment of subsidies shouldn’t really have much of an impact on inflation either.

On the whole, the increase in the price level is still under Malaysia’s long term trend, but only just (fitted trend to CPI; 2000=100; dummy to account for 2008 price spikes; sample:2004:1-2010:6):

With prices expected to increase in the latter half of the year, some of that ground should be made up – or maybe not. The slope of the price level since 2009 suggests the possibility that we may be entering a period of slower price increases. That makes sense from a macro-perspective – with surplus capacity and high unemployment across the globe, there’s some powerful disinflationary headwinds to contend with. That’s not necessarily a good thing from a labour and consumer perspective, as it also presages a slow pace of income growth.

Technical Notes:

June 2010 Consumer Price Index Report from the Department of Statistics