• Inflation eased to 2.7% yoy

• Core inflation maintained at 2.2%

• Global inflationary pressures remain low

• 2018 a better year for inflation

Malaysia's headline inflation rate eased to 2.7% yoy in January of 2018, after a 3.5% rise in the prior month. It was the lowest inflation rate since December 2016, mainly due to a slowdown in cost of food & non-alcoholic beverages and transport. Prices also increased slightly in other main groups except for clothing & footwear and communications. On a monthly basis, consumer prices increased by 0.3%, following a 0.1% rise in a month earlier.

The overall index for food & non-alcoholic beverages (FNAB) which accounted 29.5% in the CPI weights, increased 3.8% (Dec’17: 4.1%) The increase in FNAB was driven by food at home (Jan’18: 3.4%; Dec’17: 3.5%), primarily vegetables, fish & seafood, milk & eggs, fruits and sugar, jam, honey, chocolate & confectionery. As for food away from home index, it continued to rise in January 2018, an increase of 4.9%.

Fuel-related prices moderates. The transportation index, which was the main catalyst of the significant increase in CPI in 2017, eased to 5.7% yoy (Dec’17: 11.5%) in January 2018. Similarly, transport price grew at a slower pace on monthly basis by 0.4% from 3.3% in the preceding month underpinned by declining retail fuel prices. The average price of 1 litre of RON95 petrol was RM2.29 in January 2018 (Dec 2017: RM2.28; Jan 2017: RM2.10). As for RON97, the average price increased to RM2.56 in January 2018 (Dec 2017: RM2.55; Jan 2017: RM2.40). The average price of diesel in January 2018 was RM2.32 as compared to RM2.05 registered in the same period of last year (Dec 2017: RM2.22). Fuels & lubricants for personal transport equipment, which accounted for 8.5% of the CPI weights, rose 8.5% yoy in January 2018 from 19.0% in December 2017.

Core inflation unchanged for third consecutive month. Core inflation, which excludes nine of the most volatile items of fresh foods as well as administered prices of goods and services, remained unchanged at 2.2% yoy in January. Among the major groups which influenced the higher core rate were price increases of FNAB (3.5%), furnishings, household equipment & routine household maintenance (2.6%), housing, water, electricity, gas & other fuels (2.5%), restaurants & hotels (2.4%), health (2.3%) and transport (2.0%).

States inflation remains steady. In terms of overall CPI, four states surpassed the national CPI rate of 2.7% yoy recorded in January 2018. The states are Melaka (3.0%), Johor (2.9%), Selangor & Wilayah Persekutuan Putrajaya (2.9%) and Negeri Sembilan (2.8%). The remaining states CPI were at par or lower than the national level index.

Meanwhile, the higher increase in the index for Food & Non-Alcoholic Beverages (FNAB) was reflected in most states in Malaysia. Five states recorded higher increases for FNAB index above the national index level (3.8%) for January 2018. The index for FNAB rose 5.4% in Wilayah Persekutuan Kuala Lumpur, 4.2% in Melaka, 4.2% in Selangor & Wilayah Persekutuan Putrajaya, 4.2% in Sabah & Wilayah Persekutuan Labuan and 4.0% in Johor.

CPI for Urban and Rural. The urban and rural CPI for January 2018 increased by 2.8% and 2.5% respectively compared with the same month in 2017. As compared to the previous month, the CPI for urban and rural increased 0.3% respectively.

CPI for Income Group Below RM3,000. The CPI for income group below RM3,000 recorded an increase of 2.7% yoy and 0.4% mom.

Global inflationary pressures remain low

US inflation came in higher than expected, jumping to 0.5% mom (2.1% yoy) in January. Core inflation was up 0.3% mom (1.8% yoy) in January. The jump in January inflation heightened inflation fears and that the Fed Reserve could be hiking rates at a faster trajectory.

UK consumer inflation remained unchanged at 3.0% yoy for the second consecutive month in January. Meanwhile, core inflation which excludes energy, food, alcohol, and tobacco rose 2.7% yoy. Meanwhile, Eurozone inflation fell to 1.3% yoy in January. Importantly, core inflation rose to 1.0% yoy.

China CPI eased off to 1.5% yoy in January while the core inflation cooled to 1.9% yoy. Consumer prices in Japan rose by 1.4% yoy in January after a 1.0% gain in the prior month. Japan’s core CPI remained at 0.9% yoy in January on higher energy costs, and remained positive for the 13th consecutive month. The rate had also stood at 0.9% in each of the previous two months.

Philippines inflation spiked to 4.0% yoy in January from 3.3% in December, fastest pace of inflation in more than three years. Thailand CPI came in at 0.7% yoy in January, slightly lower than 0.8% yoy in December. Thailand’s core CPI is also lower at 0.6% yoy in January. Headline inflation in Indonesia moderated to 3.3% yoy in January, from 3.6% in December. This came after prices rebounded in December, following five consecutive months of easing due mainly to a faster increase in prices of raw food. The core inflation rate, likewise, moderated to 2.7% in January, from 3% yoy in the previous month. Singapore’s inflation registered a lower rate of 0.0% yoy in January, down from 0.4% yoy in December. On the other hand, core inflation inched higher to 1.4% yoy, from 1.3% yoy a month ago. The central bank expects 2018 core inflation to stay in the 1-2% range, while headline inflation is forecast to be in the 0-1% range.

2018 a better year for inflation

For Malaysia, 2017 saw inflation rate nearly doubled to 3.9% from 2.1% in 2016. Higher transport costs led by fuel prices were mainly responsible for the higher inflation. Higher import prices, as well as producer prices, were the other factors. A strong ringgit last year was not much help to prevent imported inflation, which saw producer prices jumped 6.7% in 2017 from -1.1% in 2016.

Inflation for January moderated to 2.7% yoy, down from 3.5% previously. High base effect is one reason, but some fiscal measures introduced in the last budget to alleviate the cost of living for the lower-income families helped as well. Broadly, both domestic and imported inflationary pressures are largely absent.

Beside consumer prices, producer prices also declined in January. The Producer Price Index (PPI) for local production decreased by 1.2% yoy but increased 0.5% mom in January 2018. Producer inflation recorded the steepest yearly decline since July 2016, mainly due to unfavorable base effects. Cost of food products declined by 8.9% yoy (Dec’17: -4.7%), in tandem with the prices trend reflected in agriculture-related sector (-13.8% yoy). As producer prices growth lower, we can expect headline inflation to taper off further in coming months. In addition, lower cost of food products could also reduce consumer’s food prices further.

Moving forward, we foresee the slowdown inflationary pressure will stay throughout the year. Year 2018 is shaping up to be a better period for inflation. The high base should continue to dampen year over-year price increase this year. And the sustained ringgit appreciation trend should mitigate the spillover of rising global commodity prices. Therefore, we maintain our year-end OPR projection of 3.25%. However, if incoming data suggest that growth could overshoot official forecasts of 5.0%- 5.5%, this raises the odds of another hike this year.

Source: BIMB Securities Research - 1 Mar 2018