AS food supply involves many layers of players, it is challenging for the Government to pressure down food inflation in the short-term as evident in the recent hike in the prices of key items such as meat, seafood and vegetables.
However, all is not lost as MIDF Research opined that the Government still has bullets to combat inflation by injecting additional funds via fuel subsidy as guided by the consumer price index (CPI) and producer price index (PPI) weightages.
Fuel subsidy refers to the amount spent by the Government to maintain ceiling prices for RON95, Diesel, liquified petroleum gas (LPG) and cooking oil.
Currently the Government cap the retail fuel prices at RM2.05 (RON95) and RM2.15 (diesel) per liter respectively while the price of liquefied petroleum gas (LPG) has remained at RM1.90/kg since 2015 with 1kg pack for cooking oil priced at RM2.50.
“Looking at broader picture, we anticipate the Government may consider to tweak fuel prices as its main gear to control inflation,” MIDF Research pointed out in a thematic report entitled Leveraging Retail Fuel Prices to Cool Inflation.
“Fuel & lubricants hold 8.5% of CPI basket and 11.9% of PPI. By lowering the fuel prices, inflation on consumer and producer can be lowered due to its significant weightages.”
Based on historical fuel prices data, the Government used to subsidise close to 28% margin of actual RON95 price back in 2011 which cost about RM20 bil for fuel subsidy. The following year in 2012, fuel subsidy cost rose to RM27.9 bil as to cover 31.1% margin of actual fuel prices.
“We expect Brent crude oil price to range at US$75-80/barrel and US$/RM to average at RM4.09 in 2022. Hence, we estimate the Government needs to cover approximately 9.7% margin of estimated actual RON95 price, slightly higher than 6.1% margin in 2021,” projected MIDF Research.
“With these forecasted figures, presumably fuel subsidy cost may increase slightly above RM10 bil in 2022 than RM8 bil spent in 2021. If the Government were to cut 10 sen off current RON95 price to RM1.95, the margin rate would be 15.3% and on rough estimate, this may extract RM12~15 bil from the Government’s coffer.”
For the record, Malaysia’s headline CPI inflation accelerated to +3.3% year-on-year (yoy) in November (October: +2.9% yoy), the biggest gain in five months. The faster pace in overall inflation was due to both food and non-food prices.
Food inflation came in at +2.7% yoy in November – the highest since March 2018 – while non-food price growth hit five-month high at +3.6% yoy which MIDF Research attributed to cost-push factors, namely constraint in the supply-side and elevated energy prices. – Dec 29, 2021
