The Malaysian economy appears to be booming ahead of GE15 with Q2 GDP growth of 8.9% and Q3 forecast to be above 10%.

We also have a 12% pre-election increase in government spending in Budget 2023 which would push demand without commensurate supply-side reforms.

This is inflationary and moves us from specific price rises in transportation, food and utilities which is not formally inflation, to a general rise in prices which is formally inflation.

Overall headline inflation moderated to 4.5% in September but prices across more CPI components rose as costs were passed on to consumers in uncompetitive markets. Core inflation also rose to 4%.

Inflation has most likely peaked and will fall to 3.0% to 3.5% for the full year. However the general rise in prices has embedded inflationary expectations, made worse by expansionary government spending.

The inflation data show us what happened in the past, not what will happen in the future. We are seeing many input costs falling including transport and logistics costs and wholesale food production costs. So this should help inflationary pressures ease.

Oil prices remain between US$90 to US$95 which is 20% to 25% lower than in March and around where they were this time last year. So this means the percentage change year-on-year will start to fall if, as expected, oil prices remain in the current range. So the effect on the CPI will taper off.

But whereas in the past higher prices in the CPI were mainly in transport, food and utilities now there are more broad based rises and this is concerning. The 8.9% GDP growth in Q2 and forecast 10% in Q3 look like pre-election overheating and too much additional election-driven government spending will push inflation.

During 2023 we would normally expect inflation to fall because the factors causing it, oil prices, food supply issues and utilities prices, would all ease. Unfortunately, we now have extra pre-election government spending and the prospect of removing subsidies too fast and with the wrong e-wallet method.

The removal of subsidies will push inflation up if it happens too quickly without the supply-side reforms necessary to improve competition, productivity and business growth. Unfortunately Budget 2023 did not give us the structural reforms it promised.

This will be inflationary in 2023 and we won’t see inflation normalise to around 1.9% until later in the year at the earliest.

Against this backdrop, while it is not inevitable that the OPR will rise, it is more likely. Under normal circumstances since inflation is heading down and the economy is projected to slow we would expect less chance of a rise, especially since the OPR is in the normal historic range of 2.5% to 3.0% now.

Unfortunately the overheating due to government spending is very concerning. The OPR decision is based on the BNM mandate to maintain price stability and financial sector stability conducive to sustainable economic growth.

The 8.9% Q2 growth and the forecast above 10% growth for Q3 is not sustainable and puts pressure on inflation. The pre-election spending is also likely to push inflation next year because we have higher demand and the supply-side is still very constrained because of lack of reforms. This raises the prospect of further hikes in the OPR.

Fortunately BNM is independent and will make its decision based on the economic conditions and not political considerations due to the election.

Inflation is always and everywhere a bad policy phenomenon. The best thing about Budget 2023 is that it probably will not be implemented and we can hope for a different post-election policy.

Otherwise we will see government-pushed inflation and higher interest rates to try to keep it down.

The views expressed are those of the writer and do not necessarily reflect those of FMT.