Wednesday, September 7, 2011

July 2011 Consumer Price Index Report

Again late, though this time there’s more meat to get into. The July numbers don’t make comfortable viewing (log annual and monthly changes):


The core inflation number (ex-food, ex-transport) at 2.46% in annual log terms, is the highest recorded in the last ten years. That indicates broad price increases across the economy and looking at the component breakdowns we have index increases almost across the board…we’re not talking here about imported fuel based inflation alone. Overall CPI inflation is down slightly from June’s at 3.34%, largely due to a deceleration in the pain index – but that’s cold comfort I’m sure.

What we’re seeing is the ongoing pass through into broad prices from the runup in oil and food prices  before the Japan earthquake in March – you can see that the monthly log increases have settled down in the last few months, and the elevated annual numbers are largely from a “base” effect due to the relative stability of prices in the middle of last year.

I’m still of the opinion that further monetary tightening is warranted as Malaysia is probably close to it’s output constraints, as well as from the risk of unanchoring inflationary expectations. Some global trade indicators are also turning up, suggesting that the 2H2011 acceleration in growth scenario remains intact.

I’m equally certain that the Monetary Policy Committee (due to meet tomorrow) will ignore those concerns and focus more on slowing growth numbers, both domestically and abroad, while noting that monthly growth in credit has crashed to it’s lowest level since the recovery from recession began in early 2009:


As a result, don’t look for an increase in the Official Policy Rate just yet and there’s a good chance the Statutory Reserve Ratio will be held steady as well.

This is one of those either-or situations where monetary policy decisions get really iffy, and I don’t envy the people who have to bear the responsibility. On the one hand, price increases are spreading through the economy (bad for long term growth), yet economic activity right now is slowing down. It’s a judgement call, and a hard one at that.

Technical Notes:

July 2011 Consumer Price Index Report from the Department of Statistics

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