Malaysia’s June Inflation Rate Dips After GST Scrapped

Malaysia’s June Inflation Rate Dips After GST Scrapped

Following the abolishment of the 6% Goods and Services Tax (“GST”) from June 1 onwards, Malaysia’s June inflation rate eased to a 3-year low of 0.8%.

In June, the country’s inflation rate was recorded at 0.8 %, which is the lowest rate since February 2015 – the inflation rate was 0.1% in February 2015. The eased inflation rate in June is way below the market expectations of 1.3%. In fact, it showed a sharp decline from the 1.8% as recorded in May.

 

What is the Reason Behind this Declining Inflationary Pressure?

Rising inflation has been one of the headlines in Malaysia. However, the latest figures suggest that the drop in inflation rate has raised hopes of economic recovery, at least Malaysia is on the right track.

The main reasons that contributed to the easing of inflation rate were the removal of 6% GST and price control measures. The impact of the zero-rated GST and the price control schemes during the past Aidilfitri festive celebrations ( the Price Control Scheme for 22 selected items) were huge on goods’ prices in June, causing a drop in costs across all goods and services except for the transport index (that increase 5.5%  from previous year due to higher domestic fuel prices).

The Statistics Department said the declining Consumer Price Index (“CPI”) was mainly due to the decrease in all main group, including miscellaneous goods and services (-3.1%), communication (-3.0% ); recreation & culture services (-2.9%); clothing & footwear (-2.6%); furnishings, household equipment & routine household maintenance (-2.4%) and food & non-alcoholic beverages (-1%).

In 2017, the core inflation increased 0.1% due to price hike in housing, water, electricity, gas & other fuels (+2.4%); food & non-alcoholic beverages (+1%) and education (+0.9%). In contrast to previous year, the core inflation that excludes volatile items like fresh foods (in January to June 2018) has recorded changes ranging from 0.1% to 2.2%.

On top of that, economists expect that the inflationary pressure is likely to trend downwards in the remaining months of 2018. The stabilisation of fuel’s price is likely to be one of the reasons that ease the inflation rate. Currently, the price of fuel in Malaysia is pegged to the present price and no longer floating on a weekly basis like it used to be. The Finance Ministry has recently announced that the Malaysian government had allocated RM3 billion to subsidise the fuel prices until the year-end to fixed RON95 fuel and diesel at RM2.20 and RM2.18 per litre, while RON97 will be floated on a weekly basis.

 

What Does the Easing Inflation Rate Mean to Malaysian Economy?

Though the declining inflation rate does not spare the rising prices of goods and services, it does slow down the pace of price hike if compared with the growth rate when inflation is on the rise. Inflation is not merely figures or digits, but it is one of the critical factors of macroeconomic fundamentals. It is an important COG that helps both individuals and businesses to come up with long-term plans. The dropping inflation rate has raised hopes that Malaysia is moving forward to becoming a better nation with stronger economic performance.