Inflation increases in January

• Inflation at 1.6% yoy in January
• Food inflation moderated to 0.9% yoy
• Transport recorded positive growth in prices at 3.9% yoy
• Core inflation remains unchanged at 1.4%
• Covid-19 outbreak could keep global inflationary pressure on the upside
• Revised down inflation forecast to 1.6% in 2020

Malaysia's inflation rate edged up to a 20-month high of 1.6% yoy in January 2020 from 1.0% in December 2019. The increase in the overall index was driven by transport and miscellaneous goods and services. Prices of durable and non-durable goods were up 1.8% yoy and 1.6% yoy respectively in January (Dec: +1.7% and - 0.1%), while prices of semi-durable goods continued to decline by 1.0% yoy (Dec: - 0.8%). On a monthly basis, consumer prices edged up 0.1% in January, after a 0.2% gain in December.

Key drivers January inflation were higher prices transport, miscellaneous goods and services, housing, water, electricity, gas and other fuels, education and communication. On the other hand, prices went up softer for food & non-alcoholic beverage. By grouping, food price index registered a smaller gain of 0.9% yoy (Dec: 1.7%), while that of non-food price index more than tripled to 1.9% yoy (Dec: 0.6%).

Food inflation moderates. Food & non-alcoholic beverages (FNAB) price inflation moderated to a 13-month low of 0.9% yoy (Dec: +1.7% yoy) amid the implementation of Chinese New Year Price Control Scheme. Slowdown in FNAB inflation was mainly due to softer increase in the prices of fresh items. Fresh seafood recorded 3.3% yoy inflation in January (Dec: +4.5%). Both prices of food at home and food away from home also recorded smaller gains of 0.4% yoy and 1.7% yoy respectively (Dec: +1.1% and +2.5%).

Transport recorded positive growth in prices. Transport, the third largest component of CPI recorded positive growth in prices at 3.9% yoy (Dec: -1.9%; Nov: -2.4%; Oct: -2.3%; Sep: -2.2%; Aug: -2.1%; Jul: -1.9%) after 14 months being in the negative territory. Higher transport costs due to higher fuel pump prices and air passenger fares during the Chinese New Year month. Retail prices of petrol RON95, diesel and petrol RON97 averaged at RM2.08, RM2.18 and RM2.57 per litre in January 2020, higher than the RM2.00, RM2.12 and RM2.30 respectively in the corresponding month of last year. Price of fuels & lubricants for personal transport equipment was higher (Jan 2020: 5.4%; Dec 2019: -4.5%) whilst air passenger transport services cost surged by 12.2% yoy (Dec: +10.6% yoy).

Core inflation higher. Core inflation - which exclude most volatile items of fresh food as well as administered prices of goods and services – climbed up to 1.7% yoy from 1.4% yoy in December 2019.

Three states surpassed the national CPI. Three states namely Selangor & Wilayah Persekutuan Putrajaya (+2.1%), Wilayah Persekutuan Kuala Lumpur (+1.8%) and Johor (+1.8%) surpassed the national CPI rate of 1.6% yoy in January. The increase in the index of FNAB was reflected all states in Malaysia except for Kelantan. Selangor & Wilayah Persekutuan Putrajaya marked the highest rate of 1.4% yoy for F&B inflation followed by Johor (+1.3%) and Penang (+1.1%yoy). Kelantan was the only state recorded price decline in F&B by -0.1% yoy. Covid-19 outbreak could keep global inflationary pressure on the upside Thailand’s CPI climbed above the lower limit of central bank’s 1.0% target for the first time in eight months to 1.1% in Jan 2020, a slight increase from the 0.9% recorded in the previous month. This is mainly due to the increase in prices of food & non-alcoholic beverages. However, core inflation, which strips off raw food and fuel prices from the total, remained weak at 0.5% during the month. Philippine’s inflation accelerated for the third straight month to 2.9% yoy in Jan 2020 from 2.5% yoy in Dec 2019. However, the Jan inflation reading was within the Philippine central bank’s (BSP) projection of 2.5%-3.3%. Core inflation also climbed up to a 7-month high of 3.3% yoy in Jan (Dec: 3.1%). It was also markedly above the 5-year moving average level of 2.5%, implying strong domestic demand. Indonesia’s inflation for Jan 2020 came at 2.68% yoy, picking up from 2.59% yoy (revised base year) in December 2019. Core inflation, which exclude administered prices and volatile food prices, was recorded at 2.88%. The inflation figure was measured using Statistics Indonesia (BPS) new methodology, which shifts the base year of consumer price index (CPI) to 2018 = 100 (from 2012 = 100 previously).

China’s CPI rose at its largest pace since October 2011 at 5.4% yoy in Jan 2020 (Dec: 4.5%) with food prices jumping the most since 2008. The jumped in the CPI was attributed to the Lunar New Year, outbreak of covid-19 and a lower base of comparison last year. Overall, core CPI (excluding food and energy) crept higher to 1.5% yoy in January from 1.4% yoy in the two preceding months. Meanwhile, even as US January CPI increase was just 0.1% mom, inflation did surprise on the upside when compared to one year ago, as it was up 2.5% yoy from 2.3% in December. Core CPI inflation (which excludes food and energy), was up 0.2% mom, 2.3% yoy in January from 0.1% mom, 2.3% yoy in December. Japan's consumer price inflation edged down to 0.7% yoy in January 2020 from an eight-month high of 0.8% in the previous month. On the other hand, a preliminary estimate showed that Eurozone’s inflation rate is expected to edge up to 1.4% yoy in January 2020 from 1.3%, the highest inflation rate since April 2019.

Revised down inflation forecast to 1.6% in 2020

Malaysia’s overall inflation rate rose to 1.6% in January 2020, from 1.0% the preceding month. The increased was underpinned by higher transport fuel inflation amid the low-base effects on retail fuel prices.

While the duration and severity of the Covid-19 pandemic remain uncertain, it has already depressed world oil prices as China is the second largest source of global demand. The outbreak of the coronavirus has had a significant impact on commodity markets and oil has certainly felt the pressure, with the demand outlook looking weaker as a result. Travel restrictions and an extended industry shut down as a result of the coronavirus has had an impact on oil consumption within China and further afield. This has had clear implications forthe global oil market. China is much more important to the world market these days than it was back in 2003 during the SARS outbreak. It is not just air travel that has been affected, lockdowns have also meant that gasoline and diesel demand within China have come under pressure.

Taking into consideration the run cuts we have seen in China, and assuming this is an event that continues to drag on through until the end of the first quarter and into early second quarter, we estimate this could see demand growth cut in 2020. This would suggest that global demand growth could fall this year. Clearly, if travel restrictions remain in place for longer, or we are to see more widespread travel disruptions as a result of this virus, there would be further downside to the global demand.

Fuel prices play a key role here and the 15% fall in the global crude oil price in January speaks volumes about continued low transport inflation. That said, our assumption for Brent crude prices to average around USD65 per barrel this year still holds, albeit with a downside skew given the current dampened state of economic affairs.

We expect the impact of the Covid-19 outbreak to be temporary and assume a rebound by 2H20. The government will be announcing a targeted fiscal stimulus package on 27 Feb to cushion the downside risks from the Covid-19 outbreak particularly for the hardest-hit sectors. Taking into account potential downside pressure of Covid-19 on inflation in coming months, we lower our 2020 full-year inflation forecast to 1.6% from 2.0% previously. The downward revision of CPI growth forecast factors in lower transport inflation as the government has postponed its plan to float fuel prices. In addition, toll rates for all PLUS highways are reduced by 18% from February 2020. However, some upward pressure in prices could come from the food component through imported inflation as Malaysia is a net importer of food and weaker ringgit will result in the items to be more expensive. Furthermore, the OPR cut and upcoming stimulus package will provide some upward pressure as expansionary policies will generally have an upward impact to inflation.

Source: BIMB Securities Research - 21 Feb 2020