Sugar, fuel may raise July inflation level

INFLATION in Malaysia is expected to rise 1.92 per cent in July due to slightly higher prices of sugar and fuel, but it is likely to stay low this year, economists said.

The Statistics Department will release the Consumer Price Index (CPI), the official barometer of inflation, tomorrow. The CPI was up 1.7 per cent in June.

Alvin Liew from Standard Chartered Bank said the July hikes in sugar and petrol prices were "very mild" against previous hikes in 2008 which meant the inflationary impact is due to be modest.

US investment bank Citi expects a 0.5 per cent month-on-month rise in headline inflation (non-seasonally adjusted) from higher food prices due to unpredictable weather in the region.

But subsidy cuts for sugar and fuel likely made up about half of the month-on-month rise in inflation.

"We think 2010 inflation would average at a rather benign 1.8 per cent, with risks to the downside if the pass through from the already mild subsidy cuts proves more benign than we have expected," said the bank.

DBS Bank economist Irvin Seah thinks a stronger currency probably helped keep imported inflation at bay while pre-emptive interest rate hikes by Bank Negara Malaysia would keep the lid on any demand-pull inflationary pressure going forward.

"We view the most recent subsidy rationalisation move as a step in the right direction towards longer term fiscal sustainability in Malaysia and any inflationary impact is expected to be transient, as is the case for most policy-induced inflation."

By Rupa Damodaran
Business Times