The State of the Nation: Higher commodity prices and the return of inflation
THE excitement over stocks, which started last year, has now spread to another asset class — commodities. To name but a few, Brent crude has charted year-to-date gains of 27% to US$65 per barrel, tin prices are up 37% to US$28,162 per tonne, copper is up 10% to US$8,553 per tonne, iron ore has risen 4% to US$162 per tonne and wheat has gained 4% to US$6.63 per bushel.
If indeed a commodity super cycle is in the making, this could signal the return of global inflation, which has been more than benign in 2020, and possibly an end to the bull market for equities. Reuters reported that world stocks were battling to avoid a second day of declines last Thursday as hints of inflation led by a one-year high in oil prices and the strongest copper prices in nearly a decade kept traders in check after a boisterous run-up.
In Malaysia, the inflation rate for December 2020, as measured by the change in the Consumer Price Index (CPI), declined 1.4% to 120.6. For the full year, the CPI registered a decrease of 1.2% compared with 2019.
The Department of Statistics Malaysia is set to release its January 2021 inflation numbers next Wednesday. After last year’s disinflationary pattern, economists are expecting inflation to make a comeback this year.
“We expect inflation to return to positive territory by 1Q2021 and to average higher at 2.1% for the entire 2021. This is mainly based on the assumption of economic recovery post-containment measures and inoculation, firmer global oil prices and favourable statistical comparison base effects,” says UOB senior economist Julia Goh.
The food price index
Food and non-alcoholic beverages make up close to a third of the CPI basket. The index rose 1.4% year on year (y-o-y) in December, contributed by an increase in the prices of vegetables (3.6%) and meat (2.2%). The price of vegetables has for the longest time been a point of contention with the rakyat, especially near festive periods. Last December, the price of ginger shot up by 24.3%, bird’s eye chilli by 17.5%, fresh red chillies by 15.6% and round cabbage by 12.1%.
In mid-January, photos were circulating on social media of prices of tomatoes, which had shot up to RM9.75 per kg from RM3 to RM4 per kg, string beans, which rose to RM18.95 per kg from RM8 to RM9 per kg, and sawi leaves, which shot up to RM9 to RM12 per kg from RM4 to RM5 per kg before.
“Although prices of certain food items have skyrocketed, they are not unusual given their inherent volatility that can be attributed to seasonal factors, weather conditions and supply hiccups.
“Nevertheless, the average weighted price of food and non-alcoholic beverages, which account for nearly 30% of the CPI basket, is projected to edge up from 1.3% in 2020 to 1.8% this year on account of upward price pressures of selected items. It remains low compared with an average annual increase of 3% over the last 10 years or 2.5% over the last five years,” says Dr Yeah Kim Leng, professor of economics at Sunway University Business School.
Associated Chinese Chamber of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC) executive director Lee Heng Guie notes that food prices, measured by the Food and Non-Alcoholic Beverages Index have been increasing between 1.4% and 1.5% y-o-y in recent months.
“The erratic and unusual heavy rainfall, the Movement Control Order 2.0 and festive demand in the run-up to Chinese New Year have caused price fluctuations in essential food items. These will have a temporary price enhancement effect on the food price index and overall inflation in 1Q2021,” he says.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid points to Malaysia’s position as a net importer of food, and states that the country’s trade deficits in the agrofood sector stood at RM19.9 billion for the first 11 months of 2020.
“This was higher compared with deficits of RM17.4 billion in 2019. The largest trade deficits in agrofood are cereals and cereal preparations (-RM6 billion), vegetables and fruits (-RM5.9 billion), meat and meat preparation (-RM3 billion), sugars, sugar and preparations and honey (-RM2.5 billion), daily products and bird’s eggs (-RM2.4 billion), feed stuff for animals excluding unmilled cereals (-RM1.7 billion) and fish, crustacean and molluscs and preparation thereof (-RM990 million).
“Given our dependence on imports, therefore the rise in our food prices could also be contributed by changes in the exchange rate especially when the ringgit depreciates other currencies,” he tells The Edge.
The issue of rising food prices is not unique to Malaysia. According to a report by Reuters, global food prices rose for an eighth consecutive month in January to their highest since July 2014, with the Food and Agriculture Organization’s (FAO) Food Price Index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, averaging 113.3 points last month.
“For international food prices, the January increase reflected strong gains in the sugar, cereals and vegetable oils sub-indices, while meat and dairy values were also up but to a lesser extent.
“The FAO Food Price Index in January 2021 increased 4.3% compared with December 2020, marking the eighth consecutive month of rising prices and registering its highest monthly nominal average since July 2014. Continued increases in food prices are certainly cause for concern, as FAO estimates that more than three billion people in the world, 1.9 billion of them in Asia and the Pacific, cannot afford a healthy diet. Higher food prices will of course make it more difficult for many people, especially the poor, to afford a healthy diet,” FAO senior economist David Dawe tells The Edge.
As for the FAO’s assessment on Malaysian food prices, Dawe says that on an overall basis, food prices have been generally stable during the past two years — between December 2018 and December 2020.
“In nominal terms, they increased by a cumulative 3.1%, which is a small change for a two-year period. The increase is slightly stronger in real terms, that is, after adjusting for inflation, as total inflation was -0.4% during the same period. But even in real terms, the price increase has not been substantial.
“In 2019, vegetable prices increased 5.7%, more than for any other subgroup in the food category. In 2020 (December 2019 to December 2020), vegetable prices increased 3.6%, again more than for any other subgroup in the food category. Thus, for the past two years, vegetable prices have experienced the largest price increases for any food subgroup.
“In order to bring vegetable price increases in line with those for other foods, without discouraging consumption, it will be necessary to increase supply, either through domestic production or imports. The United Nations General Assembly has proclaimed 2021 to be the International Year of Fruits and Vegetables, so this is a good time to take action,” he says.
Transport index
The transport index, which makes up close to 15% of the CPI basket, decreased 8.4% y-o-y in December 2020, registering the largest decline among all the sub-indices. However, UOB’s Goh notes that this was the smallest decline for the transport category in 10 months.
“This came as retail fuel prices and airfares recovered further, in tandem with rising global crude oil prices and the reopening of economic activities.
“The wildcard is oil prices, given that there is both a direct and indirect pass-through to consumer prices due to higher fuel costs. Thus, the government imposed a on domestic fuel prices, RON95 and diesel, in view of the upside risks to inflation as Brent crude oil pushes higher above US$60 barrel,” she says.
On Feb 10, the government announced that the price ceiling for RON95 petrol would be at RM2.05 per litre, and for diesel at RM2.15 per litre. The move was made to protect consumers from the effects of any drastic spike in oil prices following the rise in global oil prices.
Sunway’s Yeah says that food prices, together with the transport component, which saw a 10% decline in 2020 due to the oil price plunge, will be the two largest contributors to the 2.5% increase in the CPI, which is the official forecast.
“Besides the oil price recovery pushing up transport prices and exerting upward pressure on energy-related consumption items, the gradual recovery in domestic demand is expected to end the disinflationary environment since March last year following the plunge in world oil prices triggered by the pandemic,” he says.
Electricity bill discounts and sales tax exemptions for passenger vehicles have also helped to temper rising prices in other CPI components, notes Goh.
Meanwhile, the CPI without fuel fell 0.1% in December 2020 to 112.8 compared with 112.9 in the same month of the preceding year. CPI without fuel covers all goods and services except unleaded petrol RON95, unleaded petrol RON97 and diesel.
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