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Latent price and cost pressures [10-02-2018]  
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PRICE pressures and increasing cost of doing business continue to be a going concern. Consumers and households have to contend with inflation and stubbornly high cost of living.

Small and medium-sized enterprises (SMEs) are struggling with the high cost of doing business, not only related to wages and rents but also costs associated with compliance and business regulations amid growing competition.

Over the past few years, the inflation pressures and expectations as well as rising cost pressures were attributed to the subsidy rationalisation, which resulted in a series of upward adjustments to administered prices of cigarettes, sugar and domestic fuel; the cascading effect of the goods and services tax (GST); food inflation; higher minimum wages; the impact of weak ringgit as well as other direct and indirect associated costs that had fed onto higher prices of goods and services as well as raw materials.

Between 2015 and 2017, the overall Consumer Price Index (CPI) rose by 5.3%, with high price increases in food and non-alcoholic beverages (7.6%), housing and utilities (4.3%), transportation (10.8%), health services (4.7%), restaurants and hotels (4.5%).

Though inflation has accelerated to 3.7% in 2017 from a moderate increase of 2.1% in CPI index in 2015 and 2.1% in 2016 respectively, Malaysian consumers and households were not convinced with the CPI as a good indicator of measuring general price levels.

The disconnect between what the average households paid on consumption of goods and services and the reported changes of general price levels in major components of CPI basket continued to be subjected to scepticism.

While it is reckoned that overall inflation would not reflect the individual cost of living, price increases exceeding the rise in wages and gross income has eroded the purchasing power, and hence less disposable income. Households have to fork out more money to consume the same basket of goods and services or even cut down on other expenses given the tight budget because of rising cost of living.

Rising cost of living has taken a heavy toll on low and middle-income households though the yearly cash handouts had provided some relief. Many households and consumers remained severely cash constrained and highly leveraged. Household debt-to-GDP ratio remains high at 84.6% at end-September 2017 though it has eased from 89.1% at end-2015.

With stretched net savings (difference between mean income and expenditure) of B40 and M40 households of RM54 per month and RM365 per month, respectively, from 2014, any unwarranted shocks to employment and income; expenditure shocks or higher prices could dampen their balance sheets and temper spending and consumption.

The ringgit has recouped some of its losses to gain by 10.8% to the US dollar for the first time in 2017, marking a turnaround from four successive years (2013-2016) of depreciation of 31.8% against the US dollar.

Given the heightened inflationary risks, a pertinent issue is whether the ringgit appreciation, if continues on a sustained basis in 2018, would dampen some of the effects of the cost-push factors and result in cost savings to consumers.

Bank Negara research suggests that a 10% appreciation of the ringgit resulted in a fall of only 0.05%-0.15% in consumer prices. While an exchange rate appreciation can lower import prices, producers may not necessarily pass on these savings completely to consumers.

The establishment of the National Cost of Living Action Council to address issues involving the cost of living is a welcome development. The focus areas are on housing, transportation, utilities as well as food and beverages.

A closer examination of the whole supply chains and distribution channels along which products travel from producers and manufacturers to track how the process flows in terms price structure, cost and ultimately the supply and demand dynamics.

Businesses, especially SMEs, who have been coping with high cost of doing business carried forward over the last few years, would brace themselves for a new wave of business cost in 2018 and 2019.

These include the implementation of the Employer Mandatory Commitment, which mandated the employers to the levy of their foreign employees; the Employment Insurance System, which stipulates that an employer has to contribute 0.2% of his or her employee’s monthly wage as an income insurance during retrenchment; higher gas prices; probable review of new minimum wage in 2018 and new foreign workers’ levy structure in 2019.

High operating and new regulatory costs eat into profit margins of businesses amid still challenging economic and business environments, coupled with rising competition. Though headline GDP growth was stronger than expected in 2017, the positive spillovers on businesses were uneven and domestic businesses, especially the retailers, are facing the threat from e-commerce and online purchases.

Large businesses are in better position to buffer themselves from the impact of inflation and increased operating costs compared to small businesses. We are already seeing some manufacturers mulling raising selling price, citing higher costs caused by inflation in the areas of energy and raw materials.

Many small businesses, which was already weakened by soft economic conditions and demand as well as rising competition, are hesitant to raise prices so as to preserve their market share and customer base. Small to mid-sized players have a weaker bargaining power and also constrained by their limited ability to switch suppliers.

But their ability to absorb cost increases may be limited if it eats into profit margins and hence, it seems almost inevitable to pass through increased costs onto consumers and retailers in the form of small price increases.

Source:THE STAR
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