Inflationary pressure may start to ease off towards year-end on lower crude oil prices and a slowdown in global economic growth.
The benchmark prices of crude oil as measured by the West Texas Intermediate (WTI) and Brent crude indices have fallen by 20% and 10% respectively since April 29 as demand for energy fell with the slower pace of growth.
Singapore-based Oversea-Chinese Banking Corp Ltd analyst Barnabas Gan told StarBiz that the fundamentals were pointing to an oil price decline, especially after Saudi Arabia, a key producer, decided to raise crude oil output to 10 million barrels a day from next month compared with the current 9.3 million barrels a day.
“The price support for WTI was previously at US$100 per barrel but now may be below US$90 towards year-end,” he added.
With oil price declining, the cost of production will go down, which may drive food prices, the main cause of higher inflation in emerging economies such as China and India, lower.
Gan said higher wheat production would contribute to easing food prices this year but the US Department of Agriculture (USDA) said in a recent report that global corn harvests would still fail to meet demand for food, fuel and livestock feed.
He added that the outlook was still unclear for major food crop prices such as wheat, corn and soybean despite the favourable weather conditions and possible drop in demand due to slower growth (which might help ease supply and inventories).
“It will depend on market fundamentals,” Gan said.
However, a Rabobank report led by global agriculture commodities research head Luke Chandler noted that there might be an easing of global prices in the second half of the year on a quarterly average basis but no collapse in prices.
He said prices might just spike to new records in coming weeks although there could be some bearish seasonality impact on the markets in the third and fourth quarters.
“Given the on-going production uncertainty and incredibly tight US and global fundamentals, particularly for corn, cotton and sugar, we're forecasting prices to remain elevated for the next 12 months, albeit slightly off the highs set during the second quarter this year,” Chandler said.
A joint report by the Organisation for Economic Cooperation and Development and the UN's Food and Agriculture Organisation noted that prices should come down in coming months compared with earlier in the year due to good harvests but that the outlook over the coming decade would see the price of cereals averaging as much as 20% higher and the price of meats as much as 30% higher over the decade compared with 2001 to 2010.
Meanwhile, AmResearch Sdn Bhd senior economist Manokaran Mottain said inflation in Malaysia would spike in July due to the electricity tariff adjustment (which would mostly impact industry users).
“Moving forward, relatively lower input costs from the lower price of oil will mean the expected increase in inflationary pressure may not take place,” he said, adding that the lower factory orders globally meant less power would be consumed.
Manokaran said the easing off of inflation meant Bank Negara would have more leeway in monetary policy, where the benchmark overnight policy rate was raised to 3% early last month.
“In my opinion, given the recent news on growth, the central bank may not raise rates when the monetary policy committee meets next month,” he said.