Headline inflation receded to 3.8% in December 2022

Latest numbers showed that Malaysia’s headline inflation slightly receded from 4.0% y/y in November 2022 to 3.8% y/y in December 2022. This brings the fullyear 2022 inflation to 3.3% (2021: 2.5%), which is in line with our forecast.

Core inflation (excluding volatile items and controlled prices) also slowed down from 4.2% y/y in November 2022 to 4.1% y/y in December 2022. This brings the full-year 2022 core inflation to 3.0%, which is the highest reading since the inception of the data in 2015.

Inflation for F&B slowed down

Inflation for food & non-alcoholic beverages slowed to 6.8% y/y in December 2022 (November 2022: 7.3% y/y), as illustrated on Exhibit 1. Nonetheless, prices for several food items continued to accelerate, including flour & cereal (+17.2% y/y), processed meat (+8.4% y/y), and margarine (+10.2% y/y).

Prices for some other food items however did slow down, including fish & seafood (+2.9% y/y), fruits (+4.0% y/y), and vegetables (0.9% y/y). For the record, we also noticed that the International Monetary Fund (IMF) had projected for lower food price index in 2023.

Demand-pull inflation is still strong

On the other items, inflation for durable goods slowed down from 3.4% y/y in November 2022 to 3.0% y/y in December 2022. Services inflation however, remained at 4.4% y/y, the highest reading ever recorded since the pandemic. All of these point to persistent demand-pull inflation in the economy, as illustrated in Exhibit 2.

Maintain 2023 inflation forecast at 3.0%

Overall, we forecast the headline inflation to be modest at 3.0% in 2023. The slowdown in inflation is partly reflecting to the Ringgit, which has been appreciating by 9.7% against the Dollar since the low of 4.75 seen in November 2022 while lower commodity prices also helped in containing the headline price pressure.

Core inflation meanwhile is expected to decline in tandem with slower rate of private consumption expected over the same period. But the risks on core inflation tilts to the upside given that the private consumption remains strong judging from the higher distributive trade sales in the 2H2022.

Furthermore, the labour market in Malaysia is somewhat tight in our view based on potential employment growth. Exhibit 3 shows that the employment growth is highly correlated with the core inflation. Coincidentally, total job vacancy in Malaysia is still 2-3 times higher than the pre-pandemic levels, as illustrated in Exhibit 4. This means the labour market in Malaysia has more room for improvement and could sustain the demand-driven inflation in Malaysia.

Nevertheless, our view will change if one of these materialises:

1) The implementation of targeted subsidy that could remove the price cap on RON95 and diesel. Our analysis shows a 1 cent increase in RON95 could push the consumer price index by 0.04%.

2) Frequent flooding or any climate-related disaster that disrupts logistics and food prices.

3) Unexpected weakening of the Ringgit that will push import prices higher.

Our OPR expectation

On the interest rates outlook, we currently maintain the call for another 25 bps rate hike in the remaining months of this year, pushing the Overnight Policy Rate (OPR) to 3.00% largely driven by the need to anchor core inflation. The latest slowdown in core inflation, in our opinion, is too early to conclude that core inflation may have peaked back in November 2022.

That said, domestic demand situation in 1H2023 is likely to influence our assessment on the OPR as well, meaning any revision to our current baseline view is possible should the situations we envisage regarding inflation and consumption do not materialise.

Source: AmInvest Research - 20 Jan 2023