OVERVIEW

In February, the Consumer Price Index (CPI) experienced a marginal uptick, registering a YoY increase of 1.8% following a three-month period of 1.5% growth. This modest rise surpassed the market's anticipated rate of 1.4%. Concurrently, core inflation, which excludes volatile and administered price components, maintained its stability, recording a YoY growth of 1.8%, consistent with January's rate.

BNM's forecast for 2024 anticipates headline inflation ranging between 2.0% and 3.5%, factoring in potential pressures stemming from fuel subsidy rationalization. This projection underscores the significance of both domestic and external dynamics in shaping inflationary trends. Domestically, adjustments in essential item prices, particularly within the energy and food sectors, could exert upward pressure on inflation, especially in the event of modifications to blanket fuel subsidies. Additionally, exchange rate fluctuations are highlighted as a critical factor, particularly for import-sensitive sectors like food and transportation. However, amidst these inflationary forces, subdued global growth prospects offer a counterbalancing effect, potentially alleviating inflationary pressures by exerting downward force on commodity prices.

Housing, water, electricity, gas & other fuels costs led the growth in headline inflation

The February CPI growth exhibited a growth of 1.8% YoY, partly attributable to the influence of high base effects that we anticipate are gradually fading away. The higher growth in housing, water, electricity, gas & other fuels to 2.7% YoY in February, from 2.0% in January has attributed to the increased growth observed in headline inflation. The latest data suggests a slight moderation in the rate for restaurant and hotel costs, with a recorded 2.9% YoY in February (3.2% in January). In February, transport inflation recorded 1.2%, compared to January's 0.7%. Specifically, the average price of Unleaded petrol RON97 experienced a surge to 3.6% in February (RM3.47 per litre), up from February 2023 (RM3.35 per litre), amid an increase of 1.3% in Brent crude oil prices to US$83.76 per barrel.

The core inflation rate, which excludes volatile and administered price items, increased modestly at 1.8% YoY in February, the same rate as the headline inflation. Nonetheless, the highest increase was recorded by food & beverages group (3.1%), and this was followed by restaurants & accommodation services at 2.9%; personal care, social protection, miscellaneous goods & services (2.5%) and health (2.3%). Excluding fuel for vehicles (RON95, RON97 and diesel), the inflation rate inclined to 1.7% YoY in February.

Only five states registered CPI readings higher than the national average of 1.8%, namely Pulau Pinang (2.7%), Pahang (2.4%), Selangor (2.1%), Perlis (2.0%) and Sarawak (1.9%). High F&B costs (Wilayah Persekutuan Putrajaya +3.2%, followed by Selangor +3.0%, Pulau Pinang +2.5%, Wilayah Persekutuan Labuan +2.3%, Sarawak +2.2%, Perlis +2.2% and Pahang +2.1%), remained a drag. Meanwhile, other states showed an increase below the national inflation of F&B costs of 1.9 % YoY in February.

Urban CPI (+1.7% YoY, January: +1.5%) exhibited the same rate as rural (+1.7%, January: +1.6% YoY) in February, 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, CPI for urban rose by 0.5% YoY, while rural increased at 0.4% in February. CPI for the income group below RM3,000 increased to 1.7% in February.

Navigating Malaysia’s inflation tightrope

BNM projects that headline inflation will hover between 2.0% and 3.5% in 2024 (PIVB: +3.0%; 2023: 2.5%). The expanded forecast range reflects the incorporation of potential inflationary pressures arising from the implementation of fuel subsidy rationalisation. Both domestic policy factors and external influences pose significant upside risks to the inflation outlook. Domestically, adjustments to essential item prices, particularly in energy and food sectors, could elevate prices, especially if blanket fuel subsidies are modified. Given fuel's substantial share in the CPI basket, any adjustments would directly impact headline inflation, albeit with a likely short-term effect as base effects diminish. However, the extent of these risks hinges on potential knock-on effects, as firms may raise prices to offset increased costs, thereby amplifying broader price pressures. While wage-price dynamics present a potential inflationary tail risk, such second-round effects are deemed minimal in Malaysia due to the alignment of wage increases with productivity growth. Furthermore, core inflation is envisaged to average between 2.0% and 3.0% in 2024 (3.0% in 2023).

Nevertheless, the short-term ramifications of fuel subsidy rationalisation on inflation and growth are contingent upon the magnitude and timing of price adjustments. Additionally, the implementation of targeted assistance alongside subsidy rationalisation will play a crucial role in mitigating the impact on vulnerable segments during the transition period.

Externally, BNM has underscored exchange rate fluctuations and global commodity price movements as additional drivers of inflationary pressure. Sectors reliant on imports, such as food and transportation, are especially susceptible to exchange rate pass-through effects, potentially intensifying inflationary strains. Moreover, persistent factors like geopolitical tensions and weather disturbances could contribute to upward pressure on food inflation. However, downside risks to inflation predominantly stem from subdued global growth prospects, which may mitigate cost pressures by exerting downward force on commodity prices.

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 Mar 2024