Monday, March 20, 2017

The Return of Inflation?

A couple of things here:

  1. Malaysian inflation will zoom this year. No, really, for real!
  2. Uh, no, not really.

What’s with the two seemingly contradictory statements?

This is what we have up to January 2017 (log annual and monthly changes):


Headline inflation topped 3.2% in January, and is likely to remain highly elevated for at least the next year or so. Here’s another look, via the raw index numbers (2000=100):


If crude oil prices stay where they are, we’re going to have a strong base effect until roughly the last quarter of 2017 – in other words, it’s a purely mechanical effect from lower oil prices in the last year.

Comparing the indexes, it’s obvious that much of the variation is coming from oil prices, and to a lesser extent, food – in other words, all coming from the Pain Index:



Brent crude oil in January was 60% higher in Ringgit terms from a year ago. Despite the recent fall back in the price of oil, that effect will continue for a while.


  1. The Ringgit strengthens considerably; and/or
  2. Oil prices fall back significantly (say, below USD40)

…we’re going to see some pretty strong headline inflation numbers for months to come, before it normalises in 2018.

What that means for monetary policy is essentially zilch – there’s no underlying increase in inflationary pressure (second order effects), just cost push factors against which monetary policy has no traction anyway. That won’t stop some commentators from thinking that BNM should tighten, but I just don’t see it happening without evidence that there has been some spillover effects. So far, core inflation is barely budging.

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