The rise in September’s headline inflation by 2.2% y/y from 2.0% in August, which is the fastest following the reimposition of MCO 3.0, was driven by cost pressures from transport and food. This brings the average inflation for the first nine months to 2.27%.

Upwards pressure on inflation is expected to stay driven by transfer pricing due to the rising cost of businesses arising from higher commodity prices and materials. This is despite a dissipating low base and a contained fuel price with the government having set the ceiling price for RON95 and diesel at RM2.05 and RM2.15, respectively until the end of this year. For the full year, we are maintaining our inflation projection at 2.6%–2.8% with no change to the OPR outlook of 1.75%.

A. Highlights

• For the month of September 2021, we are seeing Malaysia’s headline inflation rate picking up as it logged a 2.2% y/y increase compared to 2.0% in August. It is the fastest pace following the reimposition of MCO 3.0. This brings the average inflation for the first nine months to 2.27%.

• The higher inflation was due to the healthy increase in transport with an 11% y/y change, followed by food & non-alcoholic beverages at 1.9% y/y and furnishings, household equipment & routine household maintenance at 1.7% y/y. Core inflation, which does not measure volatile items of fresh foods and administered prices, remained unchanged with a 0.6% growth.

• Food and non-alcoholic beverages climbed 1.9% y/y with the highest increase recorded by meat (5.8%) mainly due to the rise in the average price of chicken in September 2021 to RM9.35 per kg as compared to RM8.50 a year ago.

• Besides, transport prices increased by 11% y/y. Petrol pump prices i.e. RON95 up by 22.0% y/y to RM2.05, RON97 +37.9% to RM2.73 while diesel added 24.3% to RM2.15.

B. Key Takeaways

• Upwards pressure on inflation is expected to stay. We expect transfer pricing to take place due to the rising cost of businesses arising from rising commodity prices and materials. This is reflected by the increase in the Producer Price Index (PPI). For August, the PPI increased by 11.3% y/y.

• But the dissipating low base and a contained fuel price with the government having set the ceiling price for RON95 and diesel at RM2.05 and RM2.15, respectively until the end of this year should dampened the rising inflationary pressure.

• For the full year, we are maintaining our inflation projection at 2.6%–2.8% with no change to the OPR outlook of 1.75%.

Source: AmInvest Research - 25 Oct 2021