OVERVIEW.

The Consumer Price Index (CPI) held steady at 1.5% YoY in January, the same rate since November 2023, slightly below market consensus of 1.6%. Meanwhile, core inflation, excluding volatile and administered price items, increased modestly at 1.8% YoY in January, as compared to 1.9% in December..

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 January CPI 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 2.0% YoY in January, from 2.3% in December 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 3.2% YoY in January (3.7% in December). In January, transport inflation recorded 0.7%, compared to December 2023's 0.3%. Specifically, the average price of Unleaded petrol RON97 experienced a surge to 3.6% in January (RM3.47 per litre), up from January 2023 (RM3.35 per litre), despite a 3.4% decline in Brent crude oil prices to US$80.23 per barrel.

The core inflation rate, which excludes volatile and administered price items, increased modestly at 1.8% YoY in January, as compared to 1.9% in December. Nonetheless, the highest increase was recorded by Restaurants & Hotels at 3.2% and this was followed by food & non-alcoholic beverages group (2.9%); miscellaneous goods & services (2.5%) and health (2.1%).

Services inflation sustained a moderating trend, declining to 1.9% YoY in January, the same rate observed in December 2023. 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 1.5% YoY in January.

Only six states registered CPI readings higher than the national average of 1.5%, namely Wilayah Persekutuan Putrajaya (2.7%), Sarawak (1.9%), Selangor (1.8%), Pulau Pinang (1.8%), Pahang (1.7%) and Perlis (1.6%). High F&B costs (Wilayah Persekutuan Labuan +3.6%, Pahang +3.0%, Wilayah Persekutuan Putrajaya +2.8%, Sarawak +2.7%, Pulau Pinang +2.7% and Selangor +2.6%), remained a drag. Meanwhile, other states showed an increase below the national inflation of F&B costs of 2.0 % YoY in January.

Urban CPI (January 2024 & December 2023: +1.5% YoY) exhibited a lower rate as compared to rural (+1.6%, December 2023 +1.5% YoY) in January, despite the presumably more robust urban consumption patterns and higher levels of disposable income, in addition to greater exposures to relevant subsectors 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 January. CPI for the income group below RM3,000 increased at a slower rate to 1.6% in January.

Uncertainty Persists Amid Ongoing Inflationary Forces

In 2024, BNM anticipates a continuation of modest inflation in 2024, reflecting overall stability in cost and demand dynamics. However, the inflation outlook remains susceptible to shifts in domestic policies related to subsidies and price controls, along with fluctuations in global commodity prices and financial market developments. The impending review of price controls and subsidies by the Government in 2024 adds an element of uncertainty to the trajectory of inflation and demand conditions.

Our projection suggests that the inflation trajectory for this year is poised for an ascent to 3.0%. This projection depends on detailed information and a timeline regarding measures outlined in Budget 2024, especially 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 the view that the Budget is a dynamic fiscal blueprint undergoing continuous refinement. 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 OPR to pre-pandemic levels, we believe that the OPR will hold steady at 3.00% through 2024. BNM underscores that the existing OPR level aligns with a supportive monetary policy stance for the economy, consistent with the current evaluation of inflation and growth prospects

Source: PublicInvest Research - 26 Feb 2024