• Inflation decelerated to 1.3% yoy, fell by 0.3% mom

• Transportation index in a downward trend

• Core inflation grew slightly lower at 1.7%

• Higher CPI by major economies in March

• Inflation to remain moderate

Malaysia’s inflation increased 1.3% yoy in March of 2018, after a 1.4% rise in the prior month. It was the lowest inflation rate since July 2016, due to a slowdown in cost of food & non-alcoholic beverages while prices of transport fell more than in a month earlier. On monthly basis, the CPI fell by 0.3% and it was the first drop in 2018. CPI grew by 1.8% in the 1Q2018.

The overall index for food & non-alcoholic beverages (FNAB) which attributed 29.5% in the CPI weights, eased to 2.8% in March from 3.0% in a month before. The sluggish growth in the FNAB index was driven by food at home (Mar: 2.2%; Feb: 2.3%). The slowdown of price could be seen in fish & seafood, fruits, vegetable, and sugar, jam, honey, chocolate & confectionery. Likewise, food away from home index tapered down to 3.9% in March from 4.3% in the previous month.

Transportation index in a downward trend. The main component that caused the slower CPI in March was the contraction in the transport index. The cheaper petrol prices in March 2018 as compared to the corresponding month of last year was the key driver of the decline. Transportation index fell for two consecutive months (Mar: -1.5%; Feb: -0.3%). Although Brent crude prices inched up to average USD67 per barrel in March, this was offset by the stronger ringgit. As a result, retail fuel prices for RON95 and RON97 continued to decline in March. The average price of 1 litre of RON95 petrol dropped to RM2.20 in March 2018 (Feb 2018: RM2.26; Mar 2017: RM2.30). As for RON97, the average price decreased to RM2.47 in March 2018 (Feb 2018: RM2.53; Feb 2017: RM2.60). The average price of diesel in March 2018 was RM2.17 as compared to RM2.15 registered in the same period of last year (Feb 2018: RM2.24).

Core inflation lower. Core inflation, which excludes the most volatile items of fresh foods as well as administered prices of goods and services, grew slightly lower at 1.7% yoy from 1.8% in February. Among the major groups which influenced the higher core rate were price increases of FNAB (3.0%), housing, water, electricity, gas & other fuels (2.4%), furnishings, household equipment & routine household maintenance (2.1%), health (2.0%), restaurants & hotels (2.0%).

States inflation remains steady. In terms of overall CPI, three states outpaced the national CPI rate of 1.3% yoy posted in March 2018. The states are Selangor & Wilayah Persekutuan Putrajaya (1.6%), Melaka (1.5%) and Wilayah Persekutuan Kuala Lumpur (1.4%). 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. Four states recorded higher increases for FNAB index above the national index level (2.8%) for March 2018. The index for FNAB rose 4.1% in Wilayah Persekutuan Kuala Lumpur, 3.4% in Sabah & Wilayah Persekutuan Labuan, 3.4% in Johor and 3.1% in Penang.

CPI for Urban and Rural. The urban and rural CPI for March 2018 increased by 1.3% and 0.9% respectively compared with the same month in 2017. As compared to the previous month, the CPI for both, urban and rural decreased by -0.3%.

CPI for Income Group Below RM3,000. The CPI for income group below RM3,000 recorded an increase of 1.2% yoy and fell by 0.6% on monthly basis.

Higher CPI by major economies in March

Regionally, inflation picked up in March except for Malaysia. Indonesia’s CPI increased by 3.4% yoy in March from 3.2% yoy in the previous month. It is still in between the central bank’s target of range in 2018, 2.5-4.5%. Thailand’s inflation increased by 0.8% yoy in March, doubling the figure in the preceding month. However, the CPI is still below the Bank of Thailand’s target range which stood at 1.0-4.0%.

US inflation expanded by 2.4% yoy in March after posting at 2.2% yoy in February. It was the highest increase since March 2017. The core inflation rose by 2.1% yoy from a year earlier. Eurozone inflation up 1.4% yoy in March, following an increase of 1.1% in the prior month. Inflation in China decelerated to 2.1% yoy in March after picking up to the highest inflation rate since 2013 last month, 2.9% yoy. It was below expectations of 2.6% and the moderation of growth was mainly due to the receding economic growth as well as declining effects of booming demand spurred by the Lunar Near Year festival in the previous month. Furthermore, the inflation in China is expected to rise over the coming months if there is escalating dispute between China and the US. The core CPI grew 2.0% in March, lower than 2.5% increase in February.

Inflation to remain moderate

March’s CPI sustains a moderating inflation trend that started in the second half of 2017. The downshift has accelerated amid a high-base effect when inflation spiked to 4.9% in the same period last year.

Moving forward, we foresee the slowdown in inflationary pressure will persist throughout the year. This is supported by inflation rate for 1Q18 which registered at 1.8%, halved from 3.6% in 4Q17, and significantly lower when compared to 4.2% in 1Q17. In view of the unchanged domestic petrol prices in the first three weeks of April we expect April’s headline inflation to remain around 1.3%-1.5%. We maintain our full-year inflation forecast of 2.5%- 3.0% in 2018.

Source: BIMB Securities Research - 19 Apr 2018