Overview

The Consumer Price Index (CPI) held steady at 1.5% YoY in December, aligning with the market consensus of 1.5%. Meanwhile, core inflation, excluding volatile and administered price items, fell slightly to 1.9% YoY in December. In 2023, the annual inflation rate registered at 2.5%, showing a slower increase compared to the 3.3% recorded in 2022. Considering the presented Budget 2024, our projection indicates that the inflation trajectory for this year is positioned for an ascent to 3.0%. This projection hinges on the disclosure of detailed information and a timeline regarding the measures outlined in Budget 2024, notably concerning subsidy rationalisation and potential increments in indirect taxes. The Government's inclusive inflation forecast for 2024, ranging from 2.1% to 3.6%, reinforces our view that the Budget represents a dynamic and evolving fiscal blueprint, undergoing continuous refinement and enhancement..

Restaurants and Hotels Costs Led the Growth in Headline Inflation.

The December CPI growth exhibited a sustained growth at 1.5% YoY, attributable to the influence of high base effects that we anticipate are gradually fading away. The slower growth in food inflation to 2.3% YoY in December, from 2.6% in November has attributed to the sustained growth observed in headline inflation. The latest data suggests a slight moderation in the rate for restaurant and hotel costs, with a recorded 3.7% YoY in December (4.3% in November). In December, transport inflation recorded 0.3%, compared to November's 0.1%. Specifically, the average price of Unleaded petrol RON97 experienced a decrease to -3.6% in December 2023 (RM3.47 per litre), down from December 2022 (RM3.60 per litre), aligning with the decline in Brent crude oil prices (-3.8%) to US$77.86 per barrel in December.

The core inflation rate, which excludes volatile and administered price items, increased modestly at 1.9% YoY in December, as compared to 2.0% in November. Nonetheless, the highest increase was recorded by Restaurants & Hotels at 3.7% and this was followed by food & non-alcoholic beverages group (3.2%); miscellaneous goods & services (2.7%) and health (2.5%).

Services inflation sustained a moderating trend, declining to 1.9% YoY in December (compared to 2.0% in November), marking its lowest level since April 2022. This trend is attributed to the gradual easing of pent-up discretionary spending in the aftermath of the post-Covid economic reopening, with the rate now falling below the 2016-2022 long-term average of 2.0%. Excluding fuel for vehicles (RON95, RON97 and diesel), the inflation rate moderated to 1.6% YoY in December..

Only six states registered CPI readings higher than the national average of 1.5%, namely Sarawak (2.4%), Wilayah Persekutuan Putrajaya (2.1%), Perak (1.9%), Pulau Pinang (1.8%), Selangor (1.7%) and Perlis (1.6%). High F&B costs (Pulau Pinang and Wilayah Persekutuan Labuan at 3.3%, followed by Wilayah Persekutuan Putrajaya +3.1%, Selangor +3.0%, Sarawak +2.9%, Pahang +2.4% and Perlis +2.3%) remained a drag. Meanwhile, other states showed an increase below the national inflation of F&B costs of 2.3% YoY in December..

Urban CPI (December & November: +1.5% YoY) exhibited parity with rural (+1.5%, November: +1.4% YoY) in December, despite the presumably more robust urban consumption patterns and 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, both CPI for urban and rural increased at 0.2% in December. CPI for the income group below RM3,000 increased at 1.7% in December..

Uncertainty Persists Amid Ongoing Inflationary Forces.

Moving into this year, BNM anticipates that headline and core inflation will maintain a modest trajectory, contingent on the absence of significant cost shocks. However, potential risks to the inflation outlook are tied to shifts in domestic policies on subsidies and price controls, as well as fluctuations in global commodity prices and financial market dynamics. The Government's 2024 plans to reassess subsidies and price controls will impact both inflation and demand conditions, yet the timeline and detailed implementation of some Budget 2024 measures remain pending. The imminent launch of the PADU database by the government this month is poised to identify eligible groups for fuel subsidies and social welfare reforms, serving as a key indicator for potential fuel subsidy reforms. As outlined in Budget 2024, the MOF envisions inflation remaining manageable, fluctuating between 2.1% and 3.6% in 2024. Additionally, the domestic inflation outlook is subject to determinants such as increased cash aids, regional trade restrictions, geopolitical tensions, and expectations of prolonged higher global interest rates, potentially leading to currency depreciation amid tighter global financial conditions..

Given the adjustment of the Overnight Policy Rate (OPR) to pre-pandemic levels, we believe that the OPR will hold steady at 3.00% through 2024. 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. The Monetary Policy Committee (MPC) will meet this week (23-24 January).

Source: PublicInvest Research - 23 Jan 2024