Transport, food prices to face early impact from middle east conflict - Economists

PUTRAJAYA - Transport and food prices are expected to face the earliest and most visible pressure from the escalating geopolitical conflict in the Middle East, with economists warning that a gradual rise in living costs, as higher oil, logistics, and agricultural input costs filter through the economy.

IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said transport-related services tend to respond first during periods of global conflict, driven by faster adjustments in logistics, fuel-linked operations and commercial transport costs.

Food prices, he said, typically follow with a short lag as higher fertiliser, feed and distribution expenses gradually pass through the supply chain.

"Malaysia’s headline inflation currently stands at 1.6 per cent year-on-year, with transport at negative 0.7 per cent and food and beverages at 1.5 per cent.

"We expect inflation to drift towards 2.2 per cent by year-end, largely reflecting mild but sustained pressures in food and transport-related services,” he told Bernama.

Global markets turned cautious on Sunday following the United States taking military action against Iran, which raised geopolitical risks, and economists cautioned that the situation could reinforce risk-off sentiment and affect oil prices, the ringgit, and trade flows.

Meanwhile, Sedek said that oil prices below US$90 per barrel would create only moderate inflationary pressure. At the same time, a ringgit trading within the 3.90 to 4.00 range versus the US dollar would help contain imported inflation.

As for transport inflation, he said it is expected to normalise gradually from negative to slightly positive territory, and food inflation could rise to between 2.5 and 2.7 per cent due to higher production and logistics costs.

He said utilities are less sensitive in the near term because tariff adjustments do not respond automatically to short-term oil volatility.

"However, we anticipate some second-round effects within the wider economy as businesses face higher logistics, packaging, imported inputs and operational expenses.

"And these pressures will not trigger broad-based or abrupt price surges, but will instead appear gradually, particularly in food service outlets, processed food items, delivery services and sectors with thin margins”.

What Malaysians should prepare for

Sedek opined that Malaysians should prepare for a year of mildly higher prices, especially in services and food-related categories, rather than a sudden spike in fuel or electricity costs.

"Households are advised to review spending patterns and build a small liquidity buffer to manage short-term volatility,” he said while stressing that the real risk lies in higher insurance and shipping costs rather than physical shortages because Malaysia’s import channels remain diversified and functional.

On the government’s role, he said fiscal support should focus on containing costs at the source, especially within logistics and agriculture.

"The government should stabilise fertiliser costs and provide targeted support along the food supply chain, as it would be more effective in preventing broad inflation than immediate cash transfers.

"Strengthening price monitoring and maintaining current fuel subsidy structures would further anchor expectations without straining fiscal space,” he emphasised.

RON95 subsidies: Sustainable but not unlimited

Sedek also addressed the government’s pledge to maintain RON95 subsidies, saying that the sustainability of the mechanism depends heavily on Brent crude prices and the ringgit exchange rate.

"If RON95 is kept at RM1.99 per litre, additional fiscal costs would be manageable at Brent levels around US$80, but would rise substantially as Brent approaches US$90 and above.

"But the costs become structurally burdensome if oil sustains above US$90 for extended periods and increasingly difficult to justify if prices approach US$95 to US$100, particularly if accompanied by a weaker ringgit,” he said.

At the time of writing, Brent crude continued its upward momentum, rising US$1.98 or 2.55 per cent to US$79.72 per barrel.

Therefore, Sedek suggested that if adjustments become necessary, the least disruptive approach is to introduce a gradual price corridor mechanism that allows partial pass-through only once oil exceeds a specific threshold.

In addition, he said incremental adjustments within a controlled band would preserve fiscal discipline while avoiding sudden shocks to households and markets.

During a breaking-of-fast event with local community leaders at the Seri Perdana Complex on weekend, Prime Minister Datuk Seri Anwar Ibrahim said that the government will try to maintain the price of RON95 petrol for Malaysians at the current level of RM1.99 per litre despite global market uncertainty due to the conflict in the Middle East.

"Insha Allah, for the people of Malaysia, I will try to ensure there is no increase in fuel prices.

"We will give the maximum effort to hold off (on raising prices). But (the market) is beyond our control, and we cannot guarantee there won’t be any price increase,” he told reporters.

Echoing him, Economy Minister Akmal Nasrullah Nasir on Tuesday said the MADANI government has no plans to make any drastic changes to the current price or policy.

BNM likely to pause rather than ease OPR

On monetary policy, Sedek said Bank Negara Malaysia is likely to pause rather than ease interest rates despite contained inflation.

He said the current overnight policy rate of 2.75 per cent is already accommodative and premature easing during a period of geopolitical uncertainty could weaken the ringgit and amplify imported inflation.

"The central bank must remain alert to second-round effects and guard against volatility in inflation expectations,” he added.

Economist Professor Geoffrey Williams shared similar expectations for a cautious stance among policymakers.

He said the current environment is shaped more by uncertainty surrounding the unfolding geopolitical situation than by actual price or growth predictions, and that he does not foresee risks of higher interest rates in Malaysia, believing rate cuts would only be considered if growth concerns intensify.

"The inflation remains low, the ringgit is relatively strong, and import prices are contained. Malaysia’s trade position benefits from higher oil prices, although volatility in the ringgit, market corrections and domestic political uncertainty remain areas to watch,” he said.

Williams also said that most small and medium enterprises (SMEs) are not significantly affected because they are focused on domestic markets rather than external risks.

The economist advised policymakers to maintain calm, proceed steadily and avoid drastic policy shifts, expressing confidence that the conflict will subside in due course. - BERNAMA