Headline Inflation Remained at 3.7%

Malaysia’s headline inflation remained at 3.7% y/y in February 2023, which is 0.1% above of the market expectation. On month-on-month basis, headline prices increased by 0.2% m/m, same pace as previous month.

Core inflation (excluding volatile items and controlled prices) also remained at 3.9% y/y in February 2023 but is still below its peak of 4.2% y/y in November 2022. On month-on-month basis, core inflation grew slower by 0.2% (January 2023: 0.4%). As mentioned in our previous report (Viewpoints on OPR and Inflation on 3 March 2023), core inflation should be closer to 2.0% by around October 2023, as guided by our historical analysis.

Inflation for F&B Accelerated in February and Early Part of March

Inflation for food & non-alcoholic beverages accelerated to 7.0% y/y in February 2023 (January 2023: 6.7% y/y), as illustrated in Exhibit 2. Main impetus for the increase was prices of meat (+9.0% y/y), vegetables (+5.8% y/y), and fruits (+4.7% y/y).

Based on PriceCatcher by OpenDOSM, prices for several raw food items are higher in early March, which could partly be due to higher demand ahead of the festive season. Those items include glutinous rice (+43.0% m/m), imported onions (+35.3%), chilli powder (+27.9% m/m), and chicken (16.9% m/m).

We Maintain 2023 Inflation Forecast at 3.0%

Overall, we maintain our forecast that the headline inflation is expected to be at 3.0% in 2023. The slowdown is partly reflecting overall commodity prices that have eased compared to last year and improving supply chain and logistics. Therefore, price pressure coming from the supply side should ease.

We observe the same on the demand side, where wage growth in both manufacturing and the services sectors are on a downward trend since 3Q2022. Employment activities, which is correlated with core inflation, is also slowing down after peaking at 4.5% back in July 2022, as shown in Exhibit 9.

While inflation is anticipated to continue receding in the coming months, any upside surprise could be stemming from sharper depreciation of the Ringgit, logistic issues for food supply, and changes in the retail petrol prices.

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 and to preserve positive real rate position. We see the possibility for the rate increase to take place in the upcoming meeting in May, after the pause in January and March to allow the economy to adjust to the cumulative 100 bps rate hike made last year.

Source: AmInvest Research - 27 Mar 2023