OVERVIEW

In March, growth in the Consumer Price Index (CPI) persisted at 1.8%, mirroring the rate observed in February. This figure modestly deviated from market expectations, which had projected a 2% rate. Concurrently, core inflation, a metric that excludes volatile and administered price elements, sustained its steadfastness, registering a YoY figure of 1.7%.

BNM's forecast for this year 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.

Restaurant and accommodation services costs led the growth in headline inflation

The March 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 increase was driven by the incline in the main group of restaurant & accommodation services +3.0% (February: 2.9%), housing, water, electricity, gas & other fuels +3.0% (February: 2.7%) and personal care, social protection & miscellaneous goods & services +2.6% (February: 2.5%). In March, transport inflation recorded 1.3%, compared to February's 1.2%. Specifically, the average price of unleaded petrol RON97 experienced a surge to 3.6% in March (RM3.47 per litre), up from March 2023 (RM3.35 per litre), amid an increase of 8.8% in Brent crude oil prices to US$85.45 per barrel.

The core inflation rate, which excludes volatile and administered price items, increased modestly at 1.7% YoY in March. The increase was mainly driven by F&B and restaurant & accommodation services which increased at 3.0% respectively, followed by personal care, social protection & miscellaneous goods & services (2.6%), transport (2.4%), health (2.1%), housing, water, electricity, gas & other fuels (1.5%), recreation, sport & culture (1.5%), and education (1.5%). Excluding fuel for vehicles (RON95, RON97 and diesel), the inflation rate inclined to 1.8% YoY in March.

Only five states registered CPI readings higher than the national average of 1.8%, namely Pulau Pinang (3.0%), Sarawak (2.9%), Selangor (2.1%), Pahang (2.1%) and Perlis (1.9%). High F&B costs remained a drag in the following states – Selangor: +3.2%, Pulau Pinang: +2.8%, Wilayah Persekutuan Putrajaya: +2.6%, Sarawak: +2.1%, Perlis: +2.1% and Wilayah Persekutuan Labuan: +2.0%). Oher states showed an increase below the national inflation of F&B costs of 1.7% YoY in March.

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. Economy Minister Rafizi Ramli has recently reaffirmed Malaysia's commitment to the gradual reduction of petrol subsidies throughout the current fiscal year, a move aimed at ameliorating the coutnry's fiscal deficit. With the intention to phase out across-the-board subsidies for RON95 fuel, the predominant and economically significant gasoline variant, which comprised the lion's share of the RM81bn subsidy expenditure in the previous fiscal year, the Minister underscored the imperative of adhering to a specified timeline to attain the fiscal target of 4.3%. In light of this renewed emphasis, it is conceivable that the government will introduce targeted subsidies for RON95 during 2H24, aligning with its strategic fiscal objectives.

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 Apr 2024