Headline Inflation Receded to 3.7% in January 2023

Latest numbers showed that Malaysia’s headline inflation receded further from 3.8% y/y in December 2022 to 3.7% y/y in January 2023, which is in line with market expectation and the slowest pace since June 2022. On a month-on-month basis, headline inflation increased by 0.2% m/m, slightly faster than 0.2% m/m in the previous month.

Core inflation (excluding volatile items and controlled prices) also slowed down from 4.1% y/y in December 2022 to 3.9% y/y in January 2023. On a month-onmonth basis, core inflation grew faster by 0.4%.

Inflation for F&B Slowed Down

Inflation for food & non-alcoholic beverages slowed to 6.7% y/y in December 2022 (December 2022: 6.8% y/y), as illustrated in Exhibit 5. Nonetheless, prices for several food items continued to accelerate, including flour & cereal (+17.1% y/y), margarine (+10.6% y/y), and evaporated & condensed milk (+16.2% y/y).

But Prices for Selected Food Items Increased Throughout February

Looking at the PriceCatcher by OpenDOSM, prices for several raw food items increased in February. Those items include mustard greens (+25.7% m/m), imported onions (+25.4%), selected fish products and meat products, that increased by double-digit on a month-on-month basis. We believe that logistical issues, such as weather-related disaster was the key reason why prices for these selected items increased.

Core Inflation Is Receding

Core inflation 1 continued its downward trend after peaking at 4.2% y/y in November 2022. Looking at historical trend (as shown on Exhibit 9 and 10), it will take around 10 months for core inflation to go down to 2.0%. Based on this assumption where the core inflation to continue its downward trend, this means core inflation may trend lower and closer to 2.0% by October 2023.

Maintain 2023 Inflation Forecast at 3.0%

Overall, we retain our forecast that the headline inflation is expected to be at 3.0% in 2023. The slowdown is partly reflecting the recent slight appreciation of the Ringgit, which strengthened by 0.6% against the Dollar on year-to-date basis. Additionally, overall commodity prices have eased compared to last year, and supply chain disruption is improving. Therefore, price pressure coming from the supply side is expected to be easing moving. Although, we do have to note it is still above pre-pandemic level and remained elevated compared to historical level.

It is also the same case for the demand side as well, where wage growth in both manufacturing and the services sectors are on a downward trend since 3Q2022. Employment growth is also slowing down after peaking at 4.5% back in July 2022. While inflation is anticipated to continue to head south in the coming months, any upside surprise could be stemming from sharper depreciation of the Ringgit if major central banks remain persistently hawkish even after the 1H2023 and/or continuous logistic issues for food supply.

Our OPR Expectation

On the interest rate outlook, we maintain the call for another 25 bps rate hike this year, pushing the Overnight Policy Rate (OPR) to 3.00% largely driven by the need to anchor core inflation. On the timing of the hike, the probability for a rate hike in March is now assessed to be lower than our initial outlook. This is in relation to recent MPC statement where focus now is towards assessing the cumulative effect from 100 bps rate hike that had taken place last year. This implies that there is now greater chance for rate hike to take place in 2Q2023 or beyond. Any change to our OPR expectation hinges strongly on the development of core inflation in the coming months.

Source: AmInvest Research - 27 Feb 2023