OVERVIEW

The Consumer Price Index (CPI) growth improved and lowered to +1.8% YoY in October. This figure modestly undershot market projections, which had anticipated a slightly higher rate of 1.9%. Meanwhile, core inflation, excluding volatile and administered price items, fell slightly to 2.4% YoY in October. In light of the tabled Budget 2024, we have revised our inflation projection for this year to 2.7% (previous projection of 3.0% to 3.5%) vs. the Ministry of Finance's (MOF) range of 2.5% to 3.0%. Nonetheless, our assessment suggests that the inflation trajectory for 2024 is poised to exhibit an upward trajectory. This anticipation is contingent upon the release of comprehensive details and timeline pertaining to Budget 2024 measures, particularly with respect to subsidy rationalisation and prospective increases in indirect taxes. The Government's wide-ranging inflation forecast for the next year, spanning from 2.1% to 3.6%, substantiates our assertion that the Budget is, in essence, a dynamic and evolving fiscal blueprint, still undergoing refinement and enhancement.

Food and hospitality costs led the growth in headline inflation

The October CPI exhibited an improved and lower growth at 1.8% YoY (1.9% in September), attributable to the influence of high base effects that we anticipate are gradually fading away. The slower growth in food inflation to 3.6% YoY in October, from 3.9% in September has attributed to the marginal moderation observed in headline inflation. The latest data suggests an increase in the rate for restaurant and hotel costs, with a recorded 4.6% YoY in October (4.4% in September). In October, transport inflation recorded 0%, compared to September's -0.1%. Specifically, the average price of Unleaded petrol RON97 experienced a decrease to -12.4% in October this year (RM3.47 per litre), down from October last year (RM3.96 per litre), aligning with the decline in Brent crude oil prices (-2.2%) to US$91.06 per barrel in October.

The core inflation rate, which excludes volatile and administered price items, increased modestly at 2.4% YoY in October, as compared to 2.5% in September. Nonetheless, the highest increase was still recorded by the food and non-alcoholic beverages (October: 4.8%) segment.

The services inflation displayed a continued moderation to 2.4% YoY in October (2.6% in September), reaching its lowest point since May last year. We believe that this is primarily associated with the gradual reduction of pentup discretionary spending following the post-Covid pandemic economic reopening. However, the rate remains above the 2016-2022 long-term average of 2.0%. Excluding fuel for vehicles (RON95, RON97 and diesel), the inflation rate moderated to 2.1% YoY in October, from 2.3% in September.

Only four states registered CPI readings higher than the national average of 1.8%, namely Wilayah Persekutuan Putrajaya (2.7%), Sarawak (2.5%), Perak (2.2%) and Selangor (1.9%). High F&B costs (Wilayah Persekutuan Putrajaya +5.2%, Sarawak +4.8%, Selangor +4.7%, Pulau Pinang +4.5%, Melaka +3.7% and Wilayah Persekutuan Labuan +3.6%) remained a drag. Meanwhile, other states showed an increase below the national inflation of F&B costs of 3.6% YoY October.

Urban CPI (October & September: +1.9% YoY) remains ahead of rural (+1.6%, September: +1.7% YoY) in October, 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 increased at 0.2% in October, while rural increased at 0.1% in October. CPI for the income group below RM3,000 lowered to 2.0% in October.

Uncertainty Persists Amid Ongoing Inflationary Forces

On the inflation front, there has been a sustained decrease in headline inflation, declining to 2.0% in 3Q23 from 2.8% in 2Q23, primarily attributed to more moderate cost conditions. This decline was observed in both non-core and core inflation. Factors contributing to the moderation in non-core inflation include fresh food and fuel. Core inflation also decreased to 2.5% in 3Q23, down from 3.4% in 2Q23, yet it remains above its long-term average (averaging 2% between 2011 and 2019). BNM indicated that this trend is likely to persist for the remainder of 2023, with headline inflation projected to average between 2.5% and 3% for the year.

Moving into 2024, BNM projects that headline and core inflation will likely sustain a modest trend, barring any significant cost shocks. However, potential risks to the inflation outlook hinge significantly on alterations to domestic policies concerning subsidies and price controls, as well as fluctuations in global commodity prices and financial market dynamics. Notably, the Government's plans to reassess price controls and subsidies in 2024 will impact both inflation and demand conditions. However, the precise timeline and comprehensive details concerning the effective date and implementation of these Budget 2024 measures remain pending. As highlighted in the tabling of Budget 2024, MOF foresees inflation to sustain its manageability, fluctuating between 2.1% and 3.6% in 2024. Furthermore, we also believe that the domestic inflation outlook is subject to various other determinants that necessitate vigilant scrutiny in the short term. These encompass the increased cash aids, regional trade restrictions, ongoing geopolitical tensions, and the expectation of prolonged higher global interest rates, which may perpetuate currency depreciation amid tighter global financial conditions.

Furthermore, we have observed that Budget 2024 primarily indicated the Government's intention to implement a phased rationalisation of fuel subsidies, with a particular emphasis on diesel, as an approach to address apparent inefficiencies. This decision is supported by data illustrating a noteworthy 40% increase in subsidised diesel sales from 2019 to the present, despite a marginal growth of less than 3% in the number of diesel vehicles. Of significance is the current fixed price of subsidised diesel at RM2.15/litre, in stark contrast to the market rate of RM3.75/litre, resulting in a government subsidy of RM1.60/litre, equivalent to an approximate total of RM1.5bn.

We believe that the OPR will hold steady at 3.00% until at least the 2Q24. BNM has underscored that the existing OPR level aligns with a supportive monetary policy stance for the economy, in line with the current evaluation of inflation and growth prospects.

Source: PublicInvest Research - 27 Nov 2023