• CPI increased by 4.0% YoY in October, a slowdown against 4.5% in  September however

• A rise in core inflation remains a concern

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

OVERVIEW

The Consumer Price Index (CPI) remained elevated in October after expanding by 4.0% YoY, though a slowdown against September numbers (+4.5%). It was a  contrast for core inflation following its slight bumped to 4.1% YoY, a mild increase compared to 4.0% last month, highlighting further evidence of demand-driven inflation. CPI that jumped by 4.0% YoY in October, was offset however by base disadvantage following the rise in inflation last year (October  2021: +2.9%). Note that CPI could have been much higher if not for the cap in pump prices given a sustained rally in global oil prices and the steady drop in  Ringgit. On a month-on-month (MoM) basis, CPI that increased by 0.2% is a  slight rebound against September numbers (+0.1%).

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 +12.3% YoY in October (September: +12.0%), to reach USD94.83 per barrel (average). Th  increase in pump prices(i.e., RON97) was further pushed by the drop in Ringgit  (October 2022: -14.2% YoY; September: -10.7%) which has put additional pressure on oil prices per barrel in Ringgit terms (Brent crude October 2022:  RM448.34 per barrel; +28.3% YoY). This aided the surge in pump prices - the transport-sub-index’s nineteen straight months of expansion (October transport sub-component: +5.2% YoY).

The biggest component in CPI, food and beverages (non-alcoholic) – F&B  (29.5% share), also jumped, the sharpest among all components, to +7.1% YoY  (September: +6.8%), 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 sub-component, reflected by a +4.1% YoY increase in October (September: +4.0%). This is in contrast for inflation without fuel which pulled back markedly against  the previous month numbers (+4.0%; September +4.6%). The inflationary environment in October was primarily driven by a turnaround in general prices led by F&B (October: +7.1%) and restaurant and hotels (October: +6.8%) sub-indexes.

Urban CPI was ahead of the rural again, reflected by an increase of 4.2% vs. 3.0%  with both equally lifted by the turnaround in the F&B sub-component (October urban: +7.6%; rural: 5.1%). CPI for the income group below RM3,000 (October:  3.9% YoY) that was slightly below the national average (October: +4.0%) was  driven by the F&B (October: +6.8%) and restaurant and hotels (October: +7.5%)  sub-indexes. Three (3) states registered CPI that was higher than the national  average, led by Wilayah Persekutuan Putrajaya (7.6%), Selangor (4.9%) and Sarawak (4.3%) pushed by higher F&B cost (W.P. Putrajaya F&B sub-index:  +7.6%; Selangor: +8.8%; Johor: +7.8%).

On a monthly basis, CPI that reaccelerated against September or by +0.2%  (+0.1%) was underpinned by restaurant and hotels (October: +0.3%) and F&B (October: +0.5%) 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 (October 2022 unemployment: 3.6%). Core index, which excludes volatile items like transport and F&B, was slightly higher or touching 4.1% in October (September:  +4.0%) with F&B (October: +7.9%) and transport (October: +7.7%) sub-indexes emerging as the primary drivers for the index. All of CPI twelve sub-components registered gains for the month led by F&B (October: +7.1%) and restaurant and hotels (October: +6.8%) sub-indexes.

It was a steady trend for transport sub-index (October: +5.2%; September:  +5.3%) thanks price control measures for RON95 and Diesel which could have been higher given the protracted rally in global oil prices (Brent crude October 2022: RM448.34 per barrel; +28.3% 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 - 28 Nov 2022