OVERVIEW

In July, Malaysia's Consumer Price Index (CPI) growth sustained at 2.0% YoY, consistent with June's rate and slightly below market consensus of 2.1% YoY. Core inflation remained stable at 1.9% YoY. Looking ahead, inflationary risks will largely depend on the degree of spillover from domestic policy changes, particularly in subsidies and price controls, as well as global commodity price fluctuations and financial market conditions. BNM projects headline inflation to average between 2.0%-3.5% YoY for 2024, with core inflation expected to remain within a 2.0%-3.0% YoY range. The central bank's May policy statement suggests these forecasts have factored in potential impacts from subsidy rationalisation. Despite these considerations, we maintain our outlook that Bank Negara Malaysia will keep the Overnight Policy Rate (OPR) unchanged at 3% through 2024.

Restaurant & accommodation services costs led the growth in inflation

In July, Malaysia's CPI growth remained steady at 2.0% YoY, consistent with the rate observed in June, reflecting a balanced inflationary environment. Key sectors exhibited notable price increases, with restaurant and accommodation services accelerating to 3.4% YoY (June: 3.3% YoY), personal care, social protection, and miscellaneous goods and services rising to 3.2% YoY (June: 2.8% YoY), recreation, sport, and culture advancing to 2.2% YoY (June: 1.9% YoY), and health costs climbing to 1.9% YoY (June: 1.8% YoY). In July, transport inflation remained stable at 1.2% YoY, underpinned by a 3% increase in the average price of RON97 petrol, which rose to RM3.47/litre from RM3.37/litre in July last year, driven by a 6.5% YoY rise in Brent crude oil prices to US$85.30/barrel. Diesel prices in Peninsular Malaysia surged 55.8% YoY to RM3.35/litre in July (June 2023: RM2.15/litre), while prices in Sabah, Sarawak, and Wilayah Persekutuan Labuan remained unchanged at RM2.15/litre.

In July 2024, inflationary pressures moderated, with the headline inflation rate stabilising due to unchanged administered prices. Key items, including RON95 petrol and toll charges, remained flat YoY, effectively cushioning the broader inflation landscape. The stability of administered prices has been crucial in sustaining a controlled inflationary environment, underscoring the government's ongoing commitment to maintaining essential price controls.

Core inflation, excluding volatile fresh food and government-administered prices, held steady at 1.9% YoY in July 2024, marking the fourth consecutive month at this rate. This persistent rise was largely attributed to the 3.4% YoY increase in restaurant and accommodation services, underscoring sustained demand pressures and elevated input costs within the sector. Stripping out fuel prices (RON95, RON97, and diesel), the overall inflation rate edged up to 2.0% YoY in July.

In July 2024, four states registered CPI increases surpassing the national average of 2.0% YoY, led by Pulau Pinang (3.4%), Sarawak (2.7%), Pahang (2.6%), and Selangor (2.4%). The upward pressure in these states was primarily driven by sustained hikes in food and beverage prices, with Selangor experiencing a notable 3.0% YoY rise, followed by Pulau Pinang at 2.8%, Sarawak at 1.9%, Sabah at 1.7%, and both Pahang and Terengganu at 1.6%. Conversely, the remaining states saw food and beverage inflation rates trailing below the national average of 1.6% YoY.

Weathering Malaysia’s inflation tightrope

In BNM's July Monetary Policy Statement (MPS), the central bank indicated a potential upward trend in inflation for 2H24, largely driven by the recent rationalisation of diesel subsidies. This represents a departure from the more moderate inflation outlook presented in the May MPS, which was underpinned by stable demand conditions and restrained cost pressures. Despite the expected rise in inflation, it is projected to remain within manageable levels, supported by targeted mitigation measures designed to limit cost pass-through to businesses. Moving forward, the degree of inflationary risk will hinge on the extent of spillover effects from additional domestic policy adjustments related to subsidies and price controls, as well as shifts in global commodity prices and financial market dynamics. For 2024, BNM highlighted that headline and core inflation are forecasted to average within projected ranges of 2.0%-3.5% and 2.0%-3.0%, respectively, with these forecasts already factoring in the potential impact of subsidy rationalisation.

On 10 June, the retail price of diesel surged by 55.8% to RM3.35/litre. However, for the week of August 22 to 28, the retail price in Peninsular Malaysia was adjusted downwards to RM3.23/litre, reflecting a decline in global oil prices. Given diesel's minimal weighting of 0.2% in the overall headline CPI, the resulting inflationary impact remains limited. Our analysis suggests that a 1% increase in diesel prices would lead to only a 0.002% rise in the overall inflation rate. Governor Datuk Seri Abdul Rasheed Ghaffour has acknowledged the limited impact of the diesel price hike and reiterated that, based on the performance in the first half of the year, inflation is likely to stay below 3% for 2024, barring any significant internal or external shocks.

The potential introduction of targeted subsidies for RON95 in 2H24 remains under review, with no decision yet on the timing or mechanism for implementation. Concurrently, the rollout of EPF Account 3 is expected to inject approximately RM30bn into consumer spending, aimed at off setting rising living costs post-subsidy rationalisation, although this may also lead to demand-pull inflationary pressures. The staggered introduction of the new pay structure for civil servants, with phase 1 in December 2024 and phase 2 in January 2026, poses additional challenges to fiscal targets and may intensify inflationary pressures by raising wage expectations within the private sector. However, the government's phased approach to salary adjustments reflects a strategy to manage these impacts and prevent significant economic shocks. Additionally, pension adjustments are planned for December 2024, based on final salary revisions for retirees. In response, all ministries have been directed to intensify price monitoring efforts to prevent unwarranted and excessive price increases. Given that CPI averaged just 1.8% in the first seven months, coupled with the minimal inflationary impact from the services tax adjustment and diesel subsidy rationalization, as well as the expected delay in RON95 subsidy reform, we have revised our full-year inflation forecast downward to 2.0%, placing it at the lower bound of the official 2.0%-3.5% target range. To prevent sudden inflationary shocks, a phased approach to RON95 subsidy rationalisation is essential, considering its 5% weighting in the CPI basket. If implemented in 4Q24, we anticipate CPI will stay within the official target range. Furthermore, BNM’s neutral stance in the latest MPS, alongside ongoing risks, reinforces our view that the OPR will likely hold steady at 3.00% through 2024.

Source: PublicInvest Research - 23 Aug 2024