Malaysia inflation jumps as govt feels heat over living costs

Reuters

By Stuart Grudgings

KUALA LUMPUR, Jan 22 (Reuters) - Malaysia's inflation ratejumped in December, exacerbating a political headache for thegovernment over rising living costs and increasing the chancesof an early hike in interest rates this year that could furtherdampen consumer sentiment.

The statistics department said on Wednesday that theconsumer price index rose to 3.2 percent from 2.9 percent inNovember, the highest level since November 2011 and up from 1.2percent a year earlier. A Reuters poll had forecast it wouldpick up to 3.1 percent.

Faster price rises are partly a result of a series ofsubsidy cuts introduced by Prime Minister Najib Razak'sgovernment last year that have eased concerns over the SoutheastAsian nation's high debt burden and fiscal deficit.

The measures triggered a 10 percent rise in petrol pumpprices and a 15 percent hike in power tariffs that are filteringthrough to prices of other staples such as vegetables and meat.

Faster inflation is likely to prompt the central bank toraise its benchmark rate from 3 percent this year, the firstchange since mid-2011. Economists are expecting a hike ofbetween 25 and 50 basis points.

A weakening ringgit currency, which is down 1.5percent since the start of the year and at five-month lowsagainst the dollar, could add to upward pressure on pricesthrough more expensive imports, and reinforce the case forraising interest rates.

Those inflationary pressures, combined with high levels ofhousehold debt, soaring property prices and, by comparison,relatively weak wage growth could leave Najib vulnerable tocriticism from rival factions within his own party -- the UnitedMalays National Organisation (UMNO).

There is festering discontent with Najib among conservativesin UMNO after its multi-ethnic Barisan Nasional coalition onlynarrowly scraped an election victory last May.

Still, most economists expect Malaysia's economy to grow ata robust 5 percent or more this year, following an expected4.5-5.0 percent growth last year, helped by a brighter globaleconomy that should fuel its vital export sector.

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GRAPHIC:Malaysia inflation, rates http://link.reuters.com/jem28s

GRAPHIC: Malaysia inflation, food inflation http://link.reuters.com/tyc76s

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FEELING THE PINCH

But an outcry by consumers and the political opposition overthe price jumps has stung the government and could lead Najib toconsider delaying some further belt-tightening plans, analystssay. Najib was widely ridiculed in online media in recent weeksfor saying that the price of local vegetable kangkung (waterspinach) had fallen, despite price rises for most other goods.

Food and transport prices were among those that rose fastestin December from a year earlier, gaining 4.5 percent and 5.0percent respectively.

The government last week set up a special cabinet committeeto tackle the cost of living and has dispatched ministers tovisit local markets to warn against price gouging.

Rahul Bajoria, an economist at Barclays Capital inSingapore, said the government could delay plans for road tollhikes and increase cash handouts for poorer Malaysians, but wasunlikely to backtrack on its main fiscal tightening steps.

"The fiscal situation needs to be controlled," he said. "Thegovernment is in the first year of its new term, I don't thinkthat it will really turn populist at this point."

Two-thirds of Malaysian households earn less than 5,000ringgit ($1,500) per month, according to the most recent data.Consumer debt in Malaysia is the among the highest in Asia ataround 83 percent of GDP.

Surging housing prices in major urban centres like KualaLumpur, which aren't reflected in inflation figures, have addedto middle-class angst over the cost of living.

"The property market really adds to the feeling that thingsaren't improving," said Nor Zahidi Alias, chief economist at theMalaysian Rating Corporation.

Indebted consumers could take another hit this year if aweakening ringgit and higher inflation force the central bank totighten monetary policy more than expected.

Later in the year, the government is expected to announce afurther cut in fuel subsidies, followed at the beginning of 2015by the introduction of a new consumption tax at 6 percent.

"This year is not going to be as benign as last year," saidNor Zahidi. "Inflation going to be a little bit hotter,especially in second half of the year." (Reporting By Stuart Grudgings; editing by Simon Cameron-Moore)

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