OVERVIEW

The Consumer Price Index (CPI) dropped to 3.8% YoY in December (4% in November), slightly below market expectations of 3.9%. Meanwhile, core inflation rate, which excludes administered and volatile price items, declined for the first time in 16 months to 4.1% YoY in December, from 4.2% in November. Headline inflation averaged 3.3% in 2022. We are expecting the country’s headline inflation to average within the range of 3.0% - 3.5% in 2023, subject to changes in domestic policy measures. Therefore, we anticipate comprehensive clarification of the timeline and strategies for the deployment of targeted subsidies to support the B40 and M40 income groups and small businesses that have been severely impacted by recent price escalations, which we expect will be mentioned in the forthcoming Budget 2023 announcement in February.

Headline Inflation Elevated By 3.3% for Full Year 2022 (2.5% in 2021)

The Consumer Price Index (CPI) dropped to 3.8% YoY in December (4% in November), slightly below market expectations of 3.9%. The slower increase in food inflation to 6.8% YoY in December, from 7.3% in November has attributed to the lower increase in headline inflation. The implementation of the Skim Harga Maksimum Musim Perayaan (Christmas), which started from 23rd to 27th December 2022 and the imposition of a cap price for cooking oil in bottles by the government has eased the inflation of this group from continuing to soar. Additionally, the stable inflation growth was also reflected by a slower increase in the transport group, which fell slightly to 4.9% YoY in December, from 5% in November, amid stable average fuel price of RON97 at an average of RM3.35/litre in December, while the fuel price of RON95 remained capped at RM2.05/litre since February 2021. The cost of recreation services and culture also declined to 2.4% YoY in December (3.6% in November). On the other hand, costs of restaurants and hotels continued to trend higher at 7.4% YoY in December (7.0% in November).

For the full year 2022, the country’s headline inflation rate surged by 3.3% YoY compared to 2.5% in the corresponding period last year, primarily attributed to food and transport price inflation, which are also a result of geopolitical unrest between Russia and Ukraine as well as rising commodity prices globally.

Core inflation rate, which excludes administered and volatile price items, declined for the first time in 16 months to 4.1% YoY in December, from 4.2% in November. Nonetheless, the highest increase was still recorded by the food and non-alcoholic beverages (+8.1%, Nov: +8.2%) segment. Excluding fuel for vehicles (RON95, RON97 and diesel), the inflation rate rose moderately by 4% YoY in December.

Four (4) states/areas registered CPI readings higher than the national average of 3.8%, with no surprises of it again being Wilayah Persekutuan Putrajaya Dec and Nov: +7.9%), Selangor (+4.5%, Nov: +4.8%), Sarawak (+4.1%, Nov: +4.7), as well as Johor (+3.9%, Nov: +4.2%%). High F&B costs (Selangor and Sarawak: +8.4%, Wilayah Persekutuan Putrajaya: +7.5%, Sabah: +7.4% Johor: +6.9) remained a drag. Meanwhile, other states showed an increase below the national inflation of F&B costs of 6.8% YoY in December.

Urban CPI (+4.0%, Nov: +4.3% YoY) remains ahead of rural (+2.8%, Nov: +3.1% YoY), given the more robust urban consumption patterns and presumably higher levels of disposable income, in addition to greater exposures to relevant sub-sectors that are seeing more pronounced increases (ie. food and beverage, restaurants and hotels, and transport). On a monthly basis, CPI for urban registered a higher increase of +0.2% MoM, while CPI for rural showed an increase of +0.1% MoM in December. CPI for the income group below RM3,000 remained elevated at 3.6% YoY in December.

OUTLOOK: INFLATIONARY PRESSURES TO REMAIN BUT GRADUAL

We believe the country’s inflationary pressure will remain elevated in the near term but growth rate may trend lower in 1Q 2023 due to a more stable inflation of nonfood items, in tandem with guidance given by BNM in their January MPC meeting. On the production side, producer price index (PPI), a measure of inflation at the producer/manufacturer level, continued to improve further to a growth rate of 3.2% YoY in November from 4.0% in October. The PPI has been registering a declining trend for a fifth consecutive month on a year-on-year basis, indicating possible relief on inflationary pressure from the pass-through of producers to consumers. We are expecting the country’s headline inflation to average within the range of 3.0% - 3.5% in 2023, subject to changes in domestic policy measures, such as the possible introduction of a targeted fuel subsidy and price controls. Therefore, we anticipate comprehensive clarification of the timeline and strategies for the deployment of targeted subsidies to support the B40 and M40 income groups and small businesses that have been severely impacted by recent price escalations, which we expect will be mentioned in the forthcoming Budget 2023 announcement in February. The additional upside risks continue to be partially contained by the existing price controls and subsidies, notwithstanding the global commodity price developments caused mostly by the ongoing geopolitical tensions and prolonged supply-related disruptions. However, global supply chain pressure has continued to ease since mid-2022 and are also returning to historical averages.

With BNM cautioning on the heightened downside risks surrounding the outlook on economic growth, both external and internal, we are of the view that BNM will likely pause and keep the OPR unchanged at 2.75% at the March and May MPC meeting. However, while the future decision will be data-dependent, we see the likelihood of another 25bps rate hike to 3.00% in 2H23, but this hinges on domestic policy measures, such as the possible introduction of a targeted fuel subsidy and price controls, as well as global commodity price developments.

Source: PublicInvest Research - 25 Jan 2023