Nation braces for sharper price pressures as cost shocks filter through economy

CONSUMERS in Malaysia could face the fastest pace of inflation in nearly two years as early as May, with rising energy and logistics costs beginning to bite and businesses increasingly unable to shield households from higher prices.

Economists warn that firms, which have so far absorbed cost increases or relied on cheaper pre-crisis inventory, are now under mounting margin pressure as geopolitical tensions in the Middle East enter a third month with no clear resolution.

The shift raises the likelihood that higher production costs will soon be passed on more visibly to consumers.

A sustained rise in inflation beyond 2% would warrant close scrutiny, analysts say, particularly as Malaysia lacks a formal inflation-targeting framework.

The concern lies in the economy’s heavy reliance on domestic consumption, which could amplify the impact of supply-side shocks.

“Malaysia’s economy is about 60% consumption, so this transmission of a supply shock to the demand side is something to watch out for,” Dr Nungsari Ahmad Radhi, economist and chair of the Khazanah Research Institute, told The Edge.

He added that businesses can only absorb rising costs to a certain extent before passing them on.

Inflation concerns have intensified following a turnaround in factory-gate prices, which rose in March for the first time in a year.

The increase was driven by surging costs of crude oil, water and electricity, signalling that upstream pressures are building.

The producer price index, which measures wholesale inflation before it reaches consumers, rose 1% year-on-year in March. On a monthly basis, it jumped 4.1% from February, marking the steepest increase in more than two decades.

Input costs across sectors have remained elevated, from urea used in agriculture to diesel powering farm equipment, exacerbated by disruptions to global trade flows linked to the blockade of the Strait of Hormuz, a vital artery for oil and commodities.

“Inflation trajectory for Malaysia remains highly unpredictable,” said Sunway University economics professor Dr Yeah Kim Leng. He cautioned that inflation could climb to 3%, exceeding the 1.5% to 2.5% range projected by Bank Negara Malaysia, should the crisis persist.

At the same time, weak domestic demand may limit how aggressively firms raise prices in the near term, particularly as private consumption shows signs of softness.

Both Nungsari and Yeah serve on the National Economic Action Council, advising the government through the Policy Advisory Committee to the Prime Minister.

Historical patterns suggest that the transmission of cost shocks to consumer prices typically occurs within two to four months, pointing to a possible acceleration in inflation between May and July, according to Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

So far, consumer price inflation has remained relatively contained, edging up to 1.7% in March, supported by subsidies and price controls on essential goods and services.

However, underlying pressures are becoming more apparent, with core inflation — which excludes volatile and administered prices — rising to 2.1%.

“Government intervention to lower fuel costs for vulnerable sectors, particularly food production, essential services and transport, is important to reduce knock-on effects on consumer prices while protecting jobs and small businesses,” said Yeah.

Yet such measures come at a significant fiscal cost. Fuel subsidies alone now amount to around RM7 billion a month, roughly ten times pre-crisis levels, placing increasing strain on public finances.

“The government has done a lot to the point of it being unsustainable fiscally,” Nungsari remarked. -  May 5, 2026