The standard way of discussing about inflation is to look at the state of the labour market, inflation expectations, and shocks to commodity as well as food prices.
Bank Negara has warned that consumer inflation is anticipated to temporarily spike to above 5% in the second quarter of this year due to the extreme “lower base” effect from a deflation and low fuel prices in the corresponding quarter of 2020. The central bank now estimates headline inflation to average between 2.5% and 4.0% for 2021, a turnaround from a deflation of -1.2% in 2020.
The anticipated rise in inflation goes beyond low base effect. Real price pressures have increased amid a recovering economy and consumer demand, albeit unevenly.The important drivers for the large leeway around the inflation number lies in the behaviour of the prices of oil and food as well as intermediate inputs and raw materials, which can push prices more.The strong recovery in commodity prices and oil prices were averaged RM1.
This corroborated with the weighted CPI, which showed that “food away from home” has increased by 1.4% in March from 0.1% in January; and for “food at home” , price increases were fish and seafood ; oil and fats ; fruits ; and vegetables . Goods inflation will eventually spillover to services inflation as the economy adjusts to increased demand.The revival in consumer spending on pent-up demand should start sending prices higher like airfare, public transportation, hotels, dining out, and rental cars as more people feel comfortable leaving their homes amid a steady progress in the vaccination programme.
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