MIDF: Inflation down, Producer Price Index at three-year low

The refloating of retail fuel prices from January 2019 will help push down inflation on both the consumer and producer levels.

PETALING JAYA: Malaysia’s Producer Price Index (PPI), which measures changes in prices from a sellers’ perspective, is currently at a three-year low, according to MIDF Research.

The research house said in a note that Malaysia’s producer inflation slid further into negative territory of -3.7% year on year (yoy) in December 2018.

It was the sharpest drop recorded since early March 2016. This was mainly due to a drastic fall in prices in the manufacturing sector of -2.6% yoy.

The manufacturing sector holds the largest weightage of the total PPI basket at 81.6%. The agriculture, forestry and fishing sectors experienced 14 consecutive months of contraction in producer prices. Among others, the contraction in PPI was aligned with the declining global crude oil prices at the end of 2018.

“As a leading indicator of price changes at the consumer level, the latest PPI numbers suggest that Malaysia’s headline inflation will remain low for the first quarter of 2019,” said MIDF.

The refloating of retail fuel prices in January 2019 will pressure downwards inflation on both consumer and producer levels, especially with the current global energy prices.

MIDF said the fall in PPI indicated an overall fall or moderation in prices which might grant relief to the lower-income groups and boost consumer spending as well as industrial investment.

The research house foresees Malaysia’s external trade performance as well as industrial production to continue expanding during the first half on the back of a low inflationary environment and steady demand from the domestic and external fronts.

In the final month of 2018, most of the PPI in developed and emerging economies moderated. The contraction in global energy prices is the major factor pushing down the input prices. For instance, Thailand’s PPI shrank by -0.5% yoy, the lowest in eight months and Singapore’s was at a 10-month low.

In the same vein, China’s PPI is at a 21-month low.

Moving forward, MIDF anticipates a continuous slowdown in PPI globally amid sluggish pick-up in the global energy prices in the first quarter of 2019.

The Malaysian PPI is expected to improve by 1.5% in 2019. Amid low base effects, MIDF forecasts inflationary pressure from fuel-related items to pick up gradually, in tandem with modest improvement in global energy prices and solid demand from developed and emerging economies.