Malaysia – Inflation quickens to 4.4% as expected

Malaysia’s inflation increased by 4.4% y/y, which is a faster pace relative to the previous month’s 3.4%. On a month-on-month basis, prices rose by 0.4%. This brings the year-to-date inflation to 2.8%, which is within our forecast of 2.8–3.2% for this year.

Core inflation, which excludes volatile prices, accelerated to 3.4% y/y from 3.0%.

The main impetus was higher food prices, which accelerated from 6.1% to 6.9% in July, in response to some changes on subsidised food items made by the government. The highest increases were prices for meat (12.0% y/y), followed by milk, cheese and eggs (9.1% y/y).

Also, transportation component prices rose 5.6% y/y (June 2022: 5.4% y/y). Prices for RON95 and diesel were stable throughout the year, priced at RM2.05/litre and RM2.15 litre respectively. RON97, which was priced at RM4.75/litre, was 73% higher than last year, which was the main driver for higher transportation prices.

Despite price caps for several food items, including chicken (price ceiling at RM9.40/kg) and eggs (price ceiling depends on the grade), we saw that these prices were being priced above the ceiling throughout the year. In July, the actual price for a 1kg chicken was RM9.94/kg, which was 5.7% higher than the price ceiling.

Prices for eggs were also higher, where all grades A, B, and C eggs were 3 sen higher that the respective price ceilings (43 sen/egg, 41 sen/egg, and 39 sen/egg, respectively).

States that charged higher than the price ceiling were Terengganu, Selangor and KL. This was because chicken producers believed that the price was being set at their cost levels, hence the final consumer prices were raised so that retailers could obtain some profit.

Supply issues might have receded beginning July since the supply chain stress indicators have been showing a downward trend throughout the month. Plus, the global commodity prices and global food prices have declined to the same level before the Russia/Ukraine war broke out. These could be the downward pressure factors for the inflation. Also, the Producer Price Index (PPI) eased to 7.6% y/y, the slowest pace since March 2021.

Nevertheless, the upside pressure can come from the depreciation of the ringgit which could push importation costs higher. The US dollar is benefitting from the aggressively hawkish US Federal Reserve and safe-haven play induced by the heightened geopolitical situation.

Secondly, concerns are more on demand pull inflation that is coming from the improving labour market.

Employment grew fast by 4.2% in June, which is the highest increase since 2014. Also, total vacancies in the labour market were high at 460 thousand vacancies, 4 times higher than the pre-pandemic average of 100 thousand vacancies.

Wage growth in crucial sectors was also high, including the manufacturing sector by 2.4% in June 2022 (past 4-year average of 0.7%, and services sector by 4.2% vs. 5-year average of 1.3%) in June 2022. A combination of these factors could put pressure on demandpull inflation, something BNM is watching closely.

Because of this, we believe BNM will take another pre-emptive measure of hiking another 25bps in the next meeting September, and perhaps another 25bps (40% probability) in the November meeting this year, bringing the OPR to 2.75% by the end of this year.

For the full year of 2022, we are expecting inflation to be between 2.8% and 3.2% this year and will ease to 2.6% in 2023.

Source: AmInvest Research - 30 Aug 2022