Headline inflation eased in April

Malaysia’s headline inflation continued its downward trend, easing to 3.3% y/y in  April 2023 (March 2023: 3.4% y/y). This brings the year-to-date inflation to 3.5%,  which is on the upper-bound of our full-year forecast of between 3.0 – 3.5%. On a  month-on-month basis, headline prices increased by 0.1% m/m, the same pace as  in March 2023.

Core inflation (excluding volatile items and controlled prices) also eased to 3.6% y/y  in April 2023 (March 2023: 3.8% y/y). On a month-on-month basis, core inflation did not increase nor decrease (March 2023: 0.2%).

Prognosis on headline inflation

Our base case now assumes that the electricity tariff, diesel prices and price ceiling for selected food items to be gradually removed in the 2H2023 as guided by the official announcements. We now expect headline inflation in 2023 to be in the range of 3.0%-3.5%, which remains within the range of Ministry of Finance and Bank  Negara Malaysia’s forecast of 2.8-3.8%.

Prognosis on core inflation

Given that our full-year expectation of the OPR at 3.00% has been realized, there is  a case now that the monetary policy normalisation in Malaysia may have ended given the pessimism in the global growth outlook. The risk to our OPR view depends mostly on core inflation but for now we still expect core inflation to continue declining  at very gradual pace premised on the followings:

• Our analysis shows that both core inflation and employment growth are highly correlated, meaning a boost to domestic demand. Since employment growth has been slowing down since the beginning of the year, the increase for the core  index should be modest as well.

• The impact from the 125 bps cumulative rate hikes since May 2022 should continue to play its role in anchoring inflation expectations given the lag effect between monetary policy adjustment and the economy.
  
  Since the 3Q2022, core inflation has been increasing by 0.3% m/m on average,  which is higher than the pre-pandemic average of 0.1% m/m. We estimate that if core inflation increases by around 0.1% to 0.2% for the remainder of the year, then core inflation should be between 2.8% - 3.1%. Exhibit 1 summarizes.

Source: AmInvest Research - 29 May 2023