February 2014 Consumer Price Index

Question: Has there been an increase in inflationary pressure in the last few months?

Question: Has weakness in the Ringgit contributed to domestic inflation in Malaysia?

I think the answers might surprise a few people, for so far the answer to the first is no (at least, not yet), and the answer to the second is both yes and no.

Let me explain.

On the face of it, the first assertion sounds a bit silly (log annual and monthly changes):

All the growth numbers are up, except for the monthly change in the pain index. The headline growth rate has touched the peak last seen in June 2011, and more to the point, is set to exceed it pretty soon. Core inflation has taken off like a rocket.

But while these indicate very real increases in prices, that’s a very different thing from an increase in inflationary pressure. The problem from an economist’s point of view and from a policy-maker’s point of view, is that all these price increases are also policy induced.

First we had the 20sen hike in petrol and diesel in September, followed by the abolishment of sugar subsidies and an increase in tobacco duty in October. January saw the revision in electricity tariffs. Add on to that seasonal increases in education and health fees, and we get a truly murky and muddy picture of underlying inflationary pressure. If I can use an analogy, we’ve stirred up the bottom of the stream, and the water is no longer clear.

From my vantage point however, I don’t see any such increase. What I’m looking for is a change in the behaviour of prices NOT affected by policy changes, and I don’t really see any:

The slope of the Food index looks like it might be starting to steepen, but it fell flat in February. The Rec index is up to (mainly due to education), but that’s after a long period of flat prices. Apart from those, there’s really no long term deviations from trend.

In short, I don’t see any further build-up in inflationary pressure in the economy relative to before the price hikes came in. The bottom line is that there’s still no grounds for an interest rate hike. Going forward that may change, but as of right now there really isn’t any.

As for the Ringgit, here’s the index for import prices and its subcomponents over the last four years (index numbers; 2005=100):

You could argue that the recent increase in prices (from about mid-2013 onwards) is due to Ringgit weakness and you might be right. But the aggregate import price level is still below what we saw in 2011-2012 (growth rates show deflation), when the Ringgit was fairly strong.

More to the point, the following is the import price index compared with the USDMYR index:

If I had to regress this, what I’d suspect I’d find is that – the movements in the last few months notwithstanding – Ringgit weakness coincides with lower, not higher, import prices. In fact, a formal modelling attempt shows no relationship at all. If you break down the import price series, the only component that is actually increasing is food – all the other components are showing deflationary tendencies.

Technical Notes:

1. February 2014 Consumer Price Index report from the Department of Statistics
2. Import & Export Price Indices, Malaysia