The Consumer Price Index (CPI) registered a slower growth rate of 3.3% YoY in April (3.4% in March), in line with market expectations. Meanwhile, the core inflation rate, which excludes volatile and administered price items, increased at a slower rate by 3.6% YoY in April (3.8% in March). We anticipate that headline inflation in the country is likely to average between 3.0% and 3.5% in 2023 (BNM and MOF forecast: 2.8% to 3.8%), with the caveat that any amendments to the cap on retail oil prices or implementation of price control measures may affect this projection.
The Consumer Price Index (CPI) registered a slower growth rate of 3.3% YoY in April (3.4% in March), mostly due to high base effects. The moderate increase in food inflation to 6.3% YoY in April, from 6.9% in March has attributed to the increase in headline inflation. The Menu Rahmah initiative, introduced by the government, to some extent helped in easing the inflation of food away from home from continuing to soar. While recent data suggests a slowdown in the rate of increase for restaurant and hotel costs, with a recorded 6.6% YoY in April (7.2% in March), such trends have been driven in part by the implementation of the Imbalance Cost Pass-Through (ICPT) mechanism in Peninsular Malaysia. The recent tariff adjustments in the electricity sector have yielded a profound impact, as evidenced by reports from the media indicating a significant average surge of 40% in costs for businesses directly affected by the changes. We believe that a potential announcement on electricity tariff revisions is anticipated in 2H23. Given falling coal and liquefied natural gas prices in 1H23, it is expected that the government's initial suggestion of a 27 sen/kWh surcharge may undergo moderation. The transportation group also experienced a deceleration in inflation growth, falling from 2.4% in March to 2.3% in April. The recent moderate increase in fuel prices reflects the direct influence of a commensurate decrease in the price of Brent crude oil, which registered a 20.5% downturn to reach US$84.11 per barrel in April. A corresponding YoY decline of 12.8% was observed in the average price of RON97, settling at RM3.35 per litre in April.
Core inflation rate, which excludes administered and volatile price items, increased at a slower rate by 3.6% YoY in April (3.8% in March). Nonetheless, the highest increase was still recorded by the food and non-alcoholic beverages (+7.2%, Mar: +7.5%) segment. The persistent trajectory of core inflation in Malaysia is intricately intertwined with the robust surge in consumer demand, with minimal influence from decelerating cost factors. Concurrently, the job market has exhibited noteworthy progress, demonstrating a consistent upward trend in employment growth exceeding 2% YoY for an uninterrupted span of 18 months. Moreover, the distributive trade sector has witnessed substantial expansion, exemplified by a double-digit YoY surge of 11.9% in sales during the month of March. Excluding fuel for vehicles (RON95, RON97 and diesel), the inflation rate rose moderately by 3.6% YoY in April.
Five (5) states/areas registered CPI readings higher than the national average of 3.3%, with no surprises of it again being Wilayah Persekutuan Putrajaya (+4.1%, Mar: +4.5%), Sarawak (+3.9%, Mar: +3.8%), Selangor (+3.8%, Mar: +4.0%), Pahang (+3.5%, Mar: +3.7%) and Perak (+3.4%, Mar: 3.6% YoY). High F&B costs (Sarawak: +8.0%, Selangor: +7.5%, Wilayah Persekutuan Putrajaya: +7.0%, Pahang: +6.4% and Perak: +6.3%) remained a drag. Meanwhile, other states showed an increase below the national inflation of F&B costs of 6.3% YoY in April.
Urban CPI (+3.3%, Mar: +3.6% YoY) remains ahead of rural (+2.6%, Mar: +2.8% 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 remained unchanged in April, while rural decreased 0.1% MoM in April. CPI for the income group below RM3,000 increased 3.4% YoY in April.
In line with projections, headline inflation has exhibited a downward trajectory in recent months, primarily driven by the tempering of various cost factors. As we look ahead, both headline and core inflation are anticipated to witness moderation throughout the year 2023, with an official expected average ranging from 2.8% to 3.8%. Notably, despite this general easing, core inflation is poised to persist at elevated levels due to the robust state of demand conditions. Furthermore, the continued implementation of price controls and fuel subsidies will serve as partial mitigating factors, curbing the extent of inflationary pressures. It is essential to acknowledge that the inflation outlook carries a notable risk bias toward the upside, remaining acutely vulnerable to potential shifts in domestic policies pertaining to subsidies and price controls, as well as developments within financial markets and global commodity prices. We believe that the subsidy ceiling for RON 95 and diesel, set at RM2.05 and RM2.15 per litre, respectively, may be subject to review and potentially increased gradually in the latter part of the year. Without petrol subsidies, it is estimated that the actual price of RON95 has reached approximately RM3.22 per litre compared to the present RM2.05 per litre. Additionally, we estimate that eliminating fuel subsidies for the T20 income group would increase inflation by an additional 0.45-0.75ppts annually.
Given the recent rate hikes implemented by both BNM and US Fed, coupled with the continued implementation of domestic subsidies, we believe that BNM will remain steadfast in its current monetary policy stance until at least 3Q23. BNM's governor recently stated that the increase in the OPR rate was done in advance to prevent potential economic risks, as taking action later could be more expensive for the economy. With the OPR restored to pre-pandemic levels, we anticipate that BNM will adopt a wait-and-see approach, particularly with regard to the monitoring of significant central bank developments. Should Malaysia's domestic economy surpass expectations, it is not inconceivable that BNM may seek to optimise its monetary arsenal by normalising SRR from the current rate of 2.00% to 3.00% in 1H24. However, any changes to the current monetary policy stance will thus be subjected to rigorous evaluation based on further improvements in macroeconomic conditions.
Source: PublicInvest Research - 29 May 2023
Created by PublicInvest | Mar 21, 2024