As expected, headline inflation remained in the deflationary region for the 10th straight month, impacted by the ongoing Covid-19 disruptions. Headline inflation in December fell by 1.4% y/y from -1.7% y/y in November. The drag in headline inflation mainly came from transport where it slipped by 8.4% y/y in December (Nov: -11.1% y/y) as well as housing, water, electricity, gas and fuel which contracted at the same pace as in December by 3.3% y/y. This brings the full-year average to - 1.1%. It is the first time since 1969 for the economy to report a negative inflation. In 1969, headline inflation fell by 0.4% y/y.

Meanwhile, core inflation, which excludes fuel and other administered prices, maintained positive growth throughout the year. In December, core inflation rose by 0.7% y/y, similar to November. It is being supported by sustained domestic demand along with a gradual resumption of economic activities. For the full year, core inflation climbed by 1.1% y/y.

Month-on-month, the headline inflation rose 0.5% in December following -0.2% in November. The increase was supported by higher fuel pump prices. Fuel pump prices for RON95, RON97 and diesel averaged higher in December at RM1.74 per litre, RM2.04 per litre, and RM1.93 per litre, respectively (November: RM1.63 per litre, RM1.93 per litre, and RM1.75 per litre).

For 2021, the overall headline inflation is expected to normalise. This will be supported by an improving global growth and trade, added with local stimulus measures amounting to RM340bil as well as the low base. Along the line, the the Producer Price Index (PPI), which currently averages at -2.7% for the first 11 months, should also gain momentum as the current low input cost should be rising on the back of firmer commodity prices. Headline inflation should average around 1.9%–2.1%.

Source: AmInvest Research - 25 Jan 2021