July 2010 CPI: Subsidy Cuts Start Biting

Was it coincidence that the July CPI report was released on the same day as GDP? Last month’s surprise cuts in sugar subsidies and hike in petrol prices have already taken effect on inflation in July (log annual and monthly changes; 2000=100):

Again, this is mainly a food and transport cost increase – the pain index is up 2.6% on the year, compared to core inflation of 1.2% – but there’s also been some pass-through into other prices (furniture and other household items, for some strange reason).

Inflation as a whole is still running below trend and may continue to do so going forward, especially if subsidy cuts continue to be implemented in a gradual fashion:

But perceptions of inflation will continue to rise, as the pain index components are already running ahead of income increases (index numbers; 2000=100):

I continue to believe that BNM will keep monetary policy on hold for the rest of the year – this is cost-push inflation, not the more pernicious demand-led variety. More to the point, I don’t think BNM is too concerned over inflation just now, as its really a balance between a budding property bubble and potentially slowing output growth that has their attention. Which way the balance tips at this point is anybody’s guess.

Technical Notes:

July 2010 CPI report from the Department of Statistics