No fear of deflation with drop in CPI, says Guan Eng

Finance Minister Lim Guan Eng says the January 2019 price decline was not caused by recession or any kind of weak demand. (Bernama pic)

PETALING JAYA: Finance Minister Lim Guan Eng today dispelled any fear of deflation following the 0.7% year-on-year decline in the January 2019 Consumer Price Index (CPI), the first time in 10 years.

He said this is supported by Malaysia’s strong economic growth numbers, with the economy expanding by 4.7% in 2018 and likely to reach 4.9% this year.

In a statement, Lim said the January CPI decline was not the result of any weakening in consumer demand.

Instead, it was largely caused by supply factors in the form of cheaper input costs, specifically cheaper fuel.

“This makes the January 2019 price decline very different from the deflation Malaysia last experienced in 2009,” he said.

Lim said that during the global financial crisis, Malaysia suffered a recession, with the GDP contracting by 5.8% in the first quarter, 3.7% in the second quarter, and finally 1.1% in the third quarter of 2009.

“It is crucial to highlight that year-on-year price deflation followed soon after the 2009 recession began.

“Furthermore, industrial production declined significantly prior to the recession and the price deflation.

“This means the 2009 deflation was caused by a recession as households and companies tightened their belts significantly.”

On the contrary, he said the January 2019 price decline was not caused by recession or any kind of weak demand.

“The same severe GDP contraction Malaysia suffered in 2009 is nowhere to be seen today while industrial production is rising well.

“While the first quarter 2019 GDP and the industrial production figures are still being compiled, current observations on demand suggest both statistics will experience growth,” he said.

Lim said the CPI decline also proved that the abolition of the goods and services tax (GST), and replacing it with the sales and services tax (SST), as well as stabilising fuel prices with a ceiling price mechanism had worked by expanding the economic pie to benefit both businesses and the people.

“The price decline should improve the purchasing power of Malaysian consumers and add to economic growth,” he said.

He said that despite the 0.7% drop in the CPI, there was still much to be done in bringing the living cost of ordinary Malaysians to a more manageable level, especially for those in the B40 group.

“The government is working to ensure that the benefits from the reduction in CPI can be channelled downwards to a wider segment of Malaysians,” he said.