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INFLATION in Malaysia may not be as high as it is in the United States, which hit 8.6% in May, but many are watching the upside risks to inflation.
Is the uptrend in prices a short-term phenomenon on economic reopening, or does it point to something more serious and global in nature?
With most businesses still keeping stocks, inflation risks may not have worked their way through the economy yet.
Nevertheless, rising commodity prices are among the main upside risks to inflation.
Supply chain disruptions, rising business costs, labour shortages and demand-side pressures in terms of recovering demand, also lead to upside risks while the weak ringgit adds to costs and inflation pressure.
Worries over any removal of subsidies such as the hefty fuel subsidy, poses another layer of risks.
This could force the country to step up to a new cost base, with a full spectrum cost structure rewrite.
Malaysia must now recognise it cannot expect to retain the old cost paradigm.
The post-Covid 19 ecosystem is real, lest we choose to remain oblivious; the whole world is resetting, post pandemic, and this will entail a structural paradigm shift from the simplest activities to complex manufacturing processes.
The costs of product inputs have changed permanently and increased, due to defining events like the Russia-Ukraine war; these changes will drive adjustments across the value chain related to input costs.
Take the example of roti canai, where prices may have stayed the same but the person may have to order two instead of one, as the size of the bread has shrunk.
The supply chain economics from the wheat fields to the roti canai vendor to his consumer, will trigger consequent chain adjustments until a market equilibrium is found.
“Upside risks to higher and longer term inflation remains,’’ said Socio Economic Research Centre executive director Lee Heng Guie.
Oil price continues to remain elevated; despite news on production increases from the Organisation of Petroleum Exporting Countries, easing of Covid-19 measures in China has added another fillip to oil prices.
If oil prices reach further highs, testing even US$150 (RM660) per barrel, we will be staring at another round of inflationary uptick, said OCBC Bank (M) Bhd economist Wellian Wiranto.
Food is another key area to watch, with global markets still digesting the after-effects of the Russia war.
Against high fertiliser prices on concerns over the shortage of potash, there are fears that crop yields may get crimped globally as farmers are forced to cut back on the usage of fertilisers.
That could lead to further risks of supply shortage of food items, thus exacerbating food inflation that we are facing.