• CPI increased by 4.5% YoY in September versus 4.7% in August

• Core inflation rise further or to 4.0%, pushing YTD average to 2.7%.

• Combination of drivers may push the CPI to expand by +3.7% YoY in 2022 before mean reverting to 3.3% in 2023

The Consumer Price Index (CPI) eased slightly in September after reaching 4.5% YoY, a cool down compared to the year’s high of 4.7% in August. It was a contrast for core inflation however following its rise to 4.0% YoY, a reacceleration compared to 3.8% last month, highlighting further evidence of demand-driven inflation. CPI that jumped by 4.5% YoY in September, was also pushed by base effect following tepid inflation last year (September 2021: +2.2%). Note that CPI could have been much higher if not for the cap in pump prices given protracted rally in global oil prices and the drop in Ringgit. CPI was also pushed by base effect following the 10% discount for electricity tariff last year (note: under PEMERKASA stimulus package). On a month-on-month (MoM) basis, CPI that increased by 0.1% is a moderation against August numbers (+0.2%) however.

As mentioned, CPI for the month was lifted by the rally in global oil prices though it could have surged much higher if not for the cap in pump prices (RON95 petrol and diesel). Oil price, using Brent crude as a benchmark, jumped by +12.0% YoY in September (August: +32.9%), to reach USD87.96 per barrel (average), the lowest for the year nonetheless. The increase in pump prices (i.e., RON97) was further pushed by the drop in Ringgit (September 2022: -10.7% YoY; August: - 7.7%) which has put additional pressure on oil prices per barrel in Ringgit terms (Brent crude September 2022: RM407.83 per barrel; +24.0% YoY). This aided the surge in pump prices - the transport-sub-index’s eighteen straight months of expansion (September transport sub-component: +5.3% YoY).

The biggest component in CPI, food and beverages (non-alcoholic) – F&B (29.5% share), also jumped, the sharpest among all components, to +6.8% YoY (August: +7.2%), no thanks to supply disruptions and second round effect of price pressure consistent with domestic demand that continued to recover. This could have been much higher however if not for the intervention to abolish the Approved Permit (AP) for food imports by the government.

Core inflation also rebounded, consistent with the jump in the F&B subcomponent, reflected by a +4.0% YoY increase in September (August: +3.8%). This is in tandem with inflation without fuel which also expanded though matched the previous month numbers (+4.6%; August +4.6%). The inflationary environment in September was primarily driven by a turnaround in general prices led by F&B (September: +6.8%) and restaurant and hotels (September:  +6.9%) sub-indexes.

Urban CPI was ahead of the rural again, reflected by an increase of 4.8% vs. 3.4% with both equally lifted by the turnaround in the F&B sub-component (September urban: +7.3%; rural: 4.8%). CPI for the income group below RM3,000 (September: 4.4% YoY) that was slightly below the national average (September: +4.5%) was driven by the F&B (September: +6.5%) and restaurant and hotels (September: +7.2%) sub-indexes. Three (3) states registered CPI that was higher than the national average, led by Wilayah Persekutuan Putrajaya (8.1%), Selangor (5.5%) and Johor (4.7%) pushed by higher F&B cost (W.P. Putrajaya F&B sub-index: +6.8%; Selangor: +8.9%; Johor: +7.1%).

On a monthly basis, CPI that moderated to 0.1% (September: +0.2%) was underpinned by restaurant and hotels (September: +0.3%) and F&B (September: +0.3%) sub-indexes, signaling the building-up of demand-driven pressure, a concern that could last well into the fourth quarter if not until early part of 2023 consistent with improvement in Malaysia labour market (September 2022 unemployment: 3.70%). Core index, which excludes volatile items like transport and F&B, was higher or by 4.0% in September (August: +3.8%) with F&B (September: +7.5%) and restaurant and hotels (September: +6.9%) sub-indexes emerging as the primary drivers for the index. Eleven (11) out of twelve (12) sub-components registered gains for the month led by F&B (September: +6.8%) and restaurant and hotels (September: +6.9%) sub-indexes.

It was a steady trend for transport sub-index (September: +5.3%; August: +5.2%) thanks price control measures for RON95 and Diesel which could have remained elevated given the protracted rally in global oil prices (Brent crude September 2022: RM407.83 per barrel; +24.0% YoY). Note that the prices for RON95 petrol and Diesel have been kept at its ceiling since February last year and this is set to remain though there have been calls for the government to refloat the petrol prices given the huge burden on the government’s finances.

OUTLOOK: LONG-TERM TRAJECTORY REMAINS INTACT

CPI is expected to remained elevated in 4Q22 before mean reverting in 2023 thanks to a full year impact of full economic openings. This will also be aided by favorable oil price movement following OPEC+ continued supply interventions which may continue in 2023 and the Russia-Ukraine conflict which is expected to spill into next year. Private-public initiatives that will create at least >500k new employment in 2023 and a rise in disposable income will also underpin the momentum in CPI.

This will be driven further by an increase in targeted financial transfers (Bantuan Keluarga Malaysia – BKM) in 2023, a boon for consumption and disposable income. CPI is also set to be supported by a full year impact of higher minimum wage (RM1,500; +25%; private sector minimum 5 workers; May 2022), a boon for the vulnerable group (i.e., B40). Combination of drivers will push the CPI to expand by +3.3% YoY in 2023 (2022E: +3.7%) though it could exceed expectations should supply disruptions and global imbalance conditions prolong. Inflation may also rise should production bottle-necks facing the manufacturing continues. A-less-than favourable external development such as persistent rise in USD and China strict COVID-19 lockdown policies could also push inflation higher and hence, an upside risks to our projection.

Source: BIMB Securities Research - 24 Oct 2022