PublicInvest Research

Author: PublicInvest   |   Latest post: Mon, 8 Mar 2021, 10:59 AM


Economic Update - December 2020 CPI - Lackluster due to CMCO

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Consumer Price Index (CPI) recovered slightly in December, though still lackluster, no thanks to the Conditional Movement Control Order (CMCO) in several states. CPI declined by 1.4% YoY in December, a slight improvement against -1.7% in November, pushing full year CPI to -1.2%, the lowest since 1969 (-0.4%) though this was driven by a global pandemic that has lasted for almost a year, and counting. The on-going COVID-19 pandemic remains a dampener to consumer sentiment, reflected in the muted CPI ex-fuel that has remained lethargic (December: -0.1%). The deflationary environment in 2020 was largely due to a slowdown in general prices led by transport (December: - 8.4%) and housing, water, electricity, gas and other fuels (December: -3.3%).

On a monthly basis, CPI rebounded 0.5% in December (November: -0.2%), lifted especially by the transport sub-index (December: 3.0%). Core index, which excludes volatile items like transport and F&B, jumped by +0.7% in December (November: +0.7%) and was led by miscellaneous goods and services (December: +2.2%) and F&B (December: +1.2%). This pushed full year core CPI to 0.4% (2019: 1.0%), an encouraging development amid consumption that has remained favourable despite the strong headwinds of COVID-19 which pushed unemployment to surge (YTD average 2020: 4.4%: 2019: 3.3%). Seven (7) out of twelve (12) sub-components registered gains for the month led by miscellaneous goods and services (December: +2.2%) and F&B (December: +1.4%).

Transport index was still subdued (December: -8.4%; November: -11.1%) amid oil prices that were dragged by the still unfolding COVID-19 cases globally especially in advanced economies (AEs) despite the massive supply cut by OPEC+. Note that the global COVID-19 cases are close to reaching 100m, with cold weather conditions in the Northern Hemisphere potentially stoking higher risk of transmissions. The recent breakthrough in COVID-19 vaccine development provides a reprieve however though achieving a global herd immunity could take some time. This is nevertheless a catalyst that could spark a recovery in consumption and investment activities amid removal of the single largest drag to growth. Challenging global macroeconomic conditions was an impediment to the recovery of Brent crude which remained weak on a YoY basis (December: -21.5%) though this is an improvement against November (- 33.0% YoY). Pump prices slipped by 16.9% on a YoY basis (average) as a result (vs. November: -22.7%), led by RON97 (-22.5%), RON95 (-16.7%) and diesel (-11.5%).

CPI could remain lackluster in January no thanks to the reversion to the Movement Control Order (MCO) in all states except Sarawak. The impact could be cushioned however by an improved version of MCO this time around given the uninterrupted operations of key sectors like services and manufacturing sectors. The government also increased its support for the vulnerable groups, with the PERMAI aid package worth RM15bn, its fifth fiscal stimulus package since the spark of COVID-19 pandemic. CPI will also be supported by the recent recovery in oil prices thanks to Brent crude that remained on an upward trajectory which underpinned several pump prices revisions in January. Brent crude, among others, was pushed by the recent decision by Saudi Arabia to cut output to the tune of 1-2mn barrels a day and hence, the recovery in the commodity recently.


CPI is forecast to rebound in 2021 to be driven, among others by, improving sentiment following the COVID-19 vaccine breakthrough that will underpin a recovery in global commodity prices especially oil and which may facilitate a cost-driven inflation. Inflation will also be pushed by demand-driven factors amid consumption that will be supported by expansionary fiscal and monetary stimulus. Though there could be pockets of movement restrictions imposed until the nation achieves herd immunity, its implementation will likely be less restrictive versions compared to the first MCO. Operations of key economic sectors like services and manufacturing are likely to remain uninterrupted. The full impact of five COVID-19 fiscal stimulus packages and accommodative interest rate environment will also be felt this year. Though a marked turnaround, projected CPI of 2.4% in 2021 (core inflation: 1.6%) is still below the index’s long-term average of 3.0% (1960-2019) suggesting that CPI is not under undue pressure despite its rebound.

Source: PublicInvest Research - 25 Jan 2021

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