Core inflation, oil price trends are key

PETALING JAYA: With the Statistics Department set to release the consumer price index (CPI) data for June today, economists are voicing concerns that prices could face upside risks, as focus falls on core inflation rather than headline data.

Contextually, headline inflation measures the overall change in prices across the entire basket of goods and services in an economy, while core inflation excludes certain volatile items, typically food and energy, to provide a clearer picture of the underlying inflation trend.

United Overseas Bank (M) Bhd (UOB) senior economist Julia Goh is predicting headline inflation to hold around the 2% mark in June, sustaining the level from May, although she finds it interesting that fuel is becoming a shock absorber thanks to subsidies.

“Food inflation, the electricity surcharge, and lingering imported cost pressures on one side, offset by easing unsubsidised pump prices on the other,” she told StarBiz.

However, she said risks for the rest of the year are largely supply-side driven, as aside from Middle East disruptions, El Nino conditions from June 2026 through mid-2027 could pose upside risks to crop prices.

“The year-to-date inflation of 1.7% keeps a full-year outcome of around 2% within reach, but the balance of risks has shifted to the upside,” Goh cautioned.

She observed that import and producer prices have spiked, and the longer that persists, the more pass-through eventually leaks into consumer prices.

Pointedly, Goh said she would watch core inflation to see if the downtick from May continues (2% from 2.3% in January), which would signify softer demand and keep Bank Negara Malaysia (BNM) comfortable, even if headline inflation is held up by supply-side factors.

Even as price pressures in Malaysia are picking up, they remain broadly under control for now, according to Frederic Neumann, chief Asia economist and co-head of Global Investment Research Asia at HSBC

Noting that any reduction in subsidies will add to upside strain, he said this remains incremental for the time being, as Malaysia is in a relatively favourable position to broadly exercise containment, being able to afford extensive subsidies and price controls.

However, he pointed out that the renewed rise in crude oil prices, if sustained, could pose challenges in the coming months, potentially forcing a further pruning of costly subsidies that further releases inflation pressures into the economy.

“Among Asian central banks, BNM can maintain a wait-and-see approach given the greater price stability in the economy than elsewhere.

“Further disruptions to global commodity markets, however, and the potentially severe impact from El Nino, all amid robust growth, could eventually necessitate a tightening of monetary policy,” Neumann remarked.

Asia Pacific chief economist at Coface Bernard Aw emphasised that while Malaysia’s June CPI is likely to remain relatively confined by targeted fuel subsidies, there is genuine risk that underlying price pressures could combine with further subsidy rationalisation or elevated oil prices to generate stronger second-round effects on transportation and consumer prices.

“As such, while near-term inflation should remain manageable, the risks for the second half of 2026 are tilted modestly to the upside,” he warned.

Resonating with UOB’s Goh, Aw told StarBiz that attention should be paid to core inflation, food inflation and the geographic breadth of price pressures.

He said if core inflation continues to firm, it would suggest that higher logistics and operating costs are feeding into broad prices despite fuel subsidies.

“We would also monitor whether food inflation remains above headline CPI as this would signal persistent supply chain and cost pressures that are more relevant to households than energy prices,” he stressed.

Of note, Aw said if inflation becomes increasingly concentrated in certain regions other than major urban centres, therefore remaining moderate nationally, BNM is unlikely to react aggressively.

Nonetheless, he added that persistent food inflation and rising core services inflation could make the central bank less comfortable with maintaining an overly accommodating stance even if headline CPI stays relatively low because of subsidy measures.

Meanwhile, economist Yeah Kim Leng reckons that with the producer price index having jumped by 7.8% year-on-year in May, some pass-through to consumer prices is anticipated.

He is therefore expecting June headline inflation to edge up marginally by 0.1 to 0.2 percentage point, largely due to subdued demand, lower import price pressures and cautious consumer spending amid ongoing global uncertainties.

Yeah, who is also professor of economics at Sunway University, is expecting upside in food and beverage for June’s CPI, due to rising global input costs like fertilisers and animal feed, while housing and utilities face secondary pass-through pressures from energy and shipping costs.

“Transportation is the least likely to surprise, as fuel subsidy buffers and the neutral impact of the diesel restructuring have kept that category contained.

The overall low-to-moderate inflation trajectory remains sustainable for the rest of 2026, supported by continued fuel subsidies, contained domestic demand, and a resilient ringgit that helps curb imported inflation,” he said.

He said core inflation trends and state variations would influence central bank direction, with the former, which has remained steady at around 2% year-on-year, being the key indicator of whether cost pressures are becoming broad-based or remain contained to specific sectors.

Yeah explained that a sustained rise would signal that producers are passing on higher costs to consumers, potentially prompting a policy response, and given that current pressures are largely supply-driven and cushioned by fuel subsidies and stable domestic demand, BNM is expected to maintain the overnight policy rate at 2.75% for the remainder of 2026.

Taking a broader perspective, associate professor at University Kuala Lumpur Business School Mohd Harridon Mohamed Suffian believes it is worthwhile to acquire qualitative financial stress data from the public, and this in turn would be the best approach to influence BNM’s next course of action.

Separately, he noted that while government subsidies are still effect to contain inflationary pressure on the transport sector and its effects to a majority of Malaysian families, a sustained high oil price would consequently affect other components in the CPI basket of goods and services.

“It is perhaps prudent for measures to be taken to control inflationary pressure, which would help facilitate more effective economic growth,” he said.