Reference no: EM133023130

Higher average fuel price pushes up headline inflation PETALING JAYA: Headline inflation in Malaysia, which measures the more volatile food and energy prices, hit the highest level since March, rising by 4.3% year-on-year (y-o-y) in September, largely driven by the higher average fuel price.

Meanwhile, food and non-alcoholic beverages prices increased by 4.6% y-o-y, second only to transportation costs.

Bloomberg figures indicated that September's inflation was in line with expectation. It was higher than Augusts' 3.7% inflation rate.

However, despite the increase in headline inflation, the clothing and footwear and communications subgroup indices registered decline in overall prices by nearly 0.3% y-o-y in September respectively.

Moving forward, RHB Research expects the headline inflation rate to moderate, on the back of stable fuel prices and stronger ringgit.

"As for 2018, we expect inflation to moderate to 2.7%, on account of stable fuel prices, while the stronger forecast ringgit would translate into lower import prices," said RHB Research in a note.

The brokerage also indicated that Bank Negara would likely keep the overnight policy rate (OPR) unchanged at 3% for the rest of 2017, as inflation is mainly driven by cost-push factors.

However, the OPR could be increased by 25 basis points to 3.25% next year, in line with monetary policy tightening by major global central banks and as the Malaysian economy improves further.

Required:

(a) Based on the article above, describe the TWO (2) reasons for the rise in headline inflation for September 2017.

(b) Explain the relationship between inflation and the purchasing power of money.