Monday, June 27, 2011

May 2011 CPI: Danger Signals

While the headline inflation number is only slightly above the level of the past two months at 3.3%, core inflation is signalling inflation pressure is building up (log annual and monthly changes; 2000=100):


Core inflation (ex-food, ex-transport) hit 2.40% over last year’s prices, which is the second highest reading I’ve seen in the last decade. The highest was in August 2008, in the aftermath of the big hike in petrol ceiling prices that July.

Food and fuel prices aren’t slacking either, with the pain index up by 4.88%. Mind you, these number are for May, and don’t include the electricity tariff increases that took effect earlier this month. We can therefore probably look forward to a further jump in the core number next month. Where’s the price pressures otherwise coming from? In housing, and related categories such as utilities, furnishings and fittings.

I would say that the argument for a further rate hike at next Thursday’s MPC meeting has just gotten a lot stronger.

Technical Notes:

May 2011 Consumer Price Index Report from the Department of Statistics


  1. Hi bro hisham,

    Avid reader of your blog altho never commented. Wanted to ask your opinion, since i'm not an economist.

    Do you think current inflation trend is cost-push (if there is such a thing)? If it is, is there really anything govt can do about it as prices of commodities are beyond their power to manage?

    Your comment expecting hike in OPR implies that there is a need for contractionary money policy

  2. Hey Rodger,

    A few points:

    - Commodity prices have moderated lately, yet inflation has accelerated;
    - Price increases are beginning to turn up in non-commodity items;
    - Loan growth is still excessive;
    - Labour market is tight;
    - We're still seeing inflows of capital (which expand the money supply);
    - BNM is concerned over expected inflation, not current;
    - The current OPR level is at best neutral for growth

    The only factor weighing against another rate hike would be slowing growth, though that's not expected to last long. So there's scope for another rate hike (or two). Any interest rate hikes aren't going to result in a "contractionary" policy stance, because we're starting from the point of an already expansionary policy.