Money supply surge raises inflation alarm: CME
KUALA LUMPUR: Malaysia’s money supply growth has accelerated to levels last seen during the Covid-19 pandemic, while a sharp rise in producer prices is raising concerns that inflationary pressures could become more persistent, the Center for Market Education (CME) said.
Malaysia's money supply growth has boomed to levels not seen since the Covid-19 pandemic, according to the Center for Market Education (CME). In June 2026, the money supply expanded by 6.78% year-on-year, up from 3.66% in January, 4.46% in February, and 5.63% in March. This surge closely mirrors the 6.91% increase recorded in August 2020 and 6.75% rise in September 2020 during a previous monetary expansion during the pandemic.
The acceleration in money supply coincides with a tightening in supply-side factors, as producer price inflation has jumped significantly in recent months. In February, producer price inflation was at -3.45% year-on-year, but it rose to 1.10% in March, 5.38% in April, 7.77% in May, and peaked at 9.22% in June.
While consumer price inflation has remained relatively modest, increasing from 1.57% in January to 2.01% in May before easing to 1.93% in June, CME warns that the combination of a strong supply-side shock and an accelerating money supply could lead to persistent inflationary pressures. The think tank explains that such a combination can create temporary relative-price pressures that become more widespread.
CME emphasizes that supply shocks, such as disruptions in oil, shipping, and raw materials, can raise prices by altering relative scarcity but are distinct from sustained monetary inflation. Persistent inflation, however, requires the quantity of money to keep expanding relative to the quantity of goods and services available for purchase.
Malaysia faces limited capacity to address external supply constraints arising from geopolitical disruptions, like those in the Strait of Hormuz. Nonetheless, domestic policy can influence whether such pressures are accommodated through excessive money and credit expansion, according to CME.
The think tank cautions against relying solely on current consumer price data to gauge future inflation risks, as monetary expansion can precede changes in nominal income and consumer prices by several months. Inflation typically emerges after a lag of six to nine months and may take up to 18 months to fully materialise.
Malaysia's post-Covid experience demonstrates that money supply can expand while real output contracts, creating a monetary imbalance where liquidity grows faster than productive capacity. Inflation often arrives later, and once it does, it tends to moderate when money growth slows relative to output.
CME advises that monetary vigilance should go hand in hand with fiscal discipline, especially since government interventions can sustain demand, distort price signals, and influence credit and investment patterns. Policymakers should pay close attention to broad subsidy schemes, activist industrial policies, and the key role of government-linked companies in some sectors.
Subsidies can delay necessary price adjustments and increase fiscal burdens, while industrial policies may direct resources towards selected activities and promote overinvestment. A GLC-dominated economic structure could weaken the corrective role of profit, loss, and competition.
To complement monetary prudence, CME stresses that fiscal restraint should strengthen market discipline, reduce distortions, and allow investment and consumption decisions to respond more directly to genuine price signals.
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