• The headline inflation rate descended to a 9-month low of +3.4% YoY

• Core inflation remained sticky, moderating to only 3.8% YoY (vs Feb: 3.9%), which is a slower pace than headline inflation.

• Transport inflation continue to edge lower to 2.4% YoY, making the lowest reading since Feb 2021.

• The Urban CPI continued to be ahead of the rural, reflected by an increase of 3.6% vs 2.8% YoY with both equally lifted by higher F&B sub-component.

• CPI expected to remain elevated before mean reverting in 2H23.

OVERVIEW

The Consumer Price Index (CPI) for March 2023 indicated that both headline and core inflation growth moderated to 3.4% YoY and 3.8% YoY respectively (Refer Table 1). The slower increase in headline inflation was primarily driven by ease inflation in the Transport segment to 2.4% YoY. Nevertheless, inflation for  Food and Non-alcoholic beverages (6.9% YoY) and Restaurants & Hotels (7.1% YoY) remained high, even though it was lower than in February 2023. On a  monthly basis, March CPI increased only 0.1% (vs Feb: +0.2% MoM). All twelve  CPI group components register a slow growth lead by Restaurant & Hotels 0.3%  MoM, while Transport segment decline by 0.2% MoM. In 1Q23, inflation averaged at 3.6% (vs 4Q22: +3.9%).

Transport inflation continue to edge lower to 2.4% YoY (vs Feb: 3.7%), which is the lowest level seen since February 2021. The decrease can be attributed to a  decline in costs of fuels and lubricants for personal transportation equipment (- 0.9% YoY), as well as cheaper transport services. This is also in tandem with the normalization of commodity prices. We are of the opinion the fuel subsidy would be maintained for the remainder of 2023.

The biggest component in CPI, Food & Non-Alcoholic Beverages (F&B) with  29.5% share, grew at lesser pace of 6.9% YoY (vs Feb: +7.0%), thus contributing  to the moderation in inflation. This mainly due to a drop in prices of vegetables  and oil & fats. However, other key food items such as rice, bread & other cereals;  meat; fresh fish; milk powder & other dairy products; and fruits continued to  record higher prices in the month. The prices of Food at Home rose at a slower rate of 5.6% YoY (vs Feb: 5.8%) while prices of Food Away from Home advanced  by 8.6% (Feb: +8.9%). The increase in inflation of Food Away from Home to a  certain extent was mitigated by the introduction of the Menu Rahmah initiative  introduced by the government on 31st January 2023.

Core inflation moderated to 3.8% from 3.9% in February. Nevertheless, it came  off at a slower pace than headline inflation and continued to surpass headline  inflation for the sixth straight month, exceeding it by 0.38ppts (vs Feb:  +0.22ppt). The same goes for services inflation, which softened to 4.0% (vs Feb:  +4.2%) and remained above 4.0% for the seventh succeeding month. We opine  the strong inflation trend in Malaysia was driven by recovery in consumer  demand amid improving labour market.

The Urban CPI continued to be ahead of the rural, reflected by an increase of  3.6% versus 2.8% YoY. The higher in Urban was mainly attributed to the increase  in Restaurant & Hotel (7.7%) and F&B (7.2%). On a monthly basis, inflation for  Urban reflected an increase of 0.1% as compared to February. As for Rural,  inflation increased mainly due to F&B (5.1% YoY) contributed by Meat (8.6%);  Rice, bread & other cereals (5.1%); and Milk, cheese & eggs (4.7%). On a monthly  basis, Rural inflation increased by Urban 0.2% as compared to February.

Inflation by State, saw six (6) states registered CPI that was higher than the  national inflation level. Wilayah Persekutuan Putrajaya (4.5%) headed the  group followed by Selangor (4.0%), Sarawak (3.8%), Johor (3.7%), Pahang  (3.7%) and Perak (3.6%). At the other end of the spectrum, Kedah recorded the  lowest increase of 2.1%. For income group below RM3,000, inflation remain high  at 3.6% for March attributed to increase in F&B of 6.4%. Overall, we believe the sticky inflation condition is due to a build-up of demand  driven pressure. Going forward, we believe improving supply chains, economic  indicators indicating lower commodity prices and continued improvement in  Malaysia's economy via proactive monetary and fiscal policies would diminish concerns of elevated inflation arising from strong consumer demand.

OUTLOOK: INFLATION MODERATION ON TRACK

Outlook on CPI remain unchanged with inflation to stay elevated in 1H23 before  mean reverting in the later part of the year. Pullback in March's headline and  core inflation to 3.4% and 3.8% from 3.7% and 3.9% respectively, indicated that  monetary and cost of living policies instituted are gradually having an impact on  inflation. However, the pace of easing may be more moderate given the  stickiness of core inflation, which has surpassed headline inflation for a sixth  consecutive month and implying resilience of domestic demand. Nevertheless,  concerns regarding the impact of continued monetary tightening on the global  economy have risen substantially especially in the wake banking stress that  occurred in the US and Euro financial markets. In the case of Malaysia and in line  with BNM stated monetary policy considerations to continue focusing on  managing inflation risks while supporting sustainable growth, it has left the  Overnight Policy Rate (OPR) unchanged since January 2023. It is currently  looking into the dynamic changes in inflation in considering the appropriate  price stability level that will continue to support sustainable growth going  forward. In view of this and strong expectation that the momentum of  Malaysia's economic recovery will carry over into 2023, we believe BNM will  maintain its policy rate for the time being. For the rest of the year, we are also  of the view that BNM will only entertain one (1) more rate hike consideration  and that also if circumstances warrants it.

Softening global demand and improvements in supply constraints are expected to generate a more moderate cost environment in 2023. Despite this, continued strength in domestic demand and improvement in the labour market will keep core inflation elevated in the near term. Additionally, gradual subsidy rationalisation effort will also contribute to some upward impact to inflation. Considering all the underlying factors, we maintained our headline projection at 3.4% for 2023.

Upside risks: i) rise in global commodity prices due to worsening geopolitical conflict in Ukraine, and extreme weather conditions, ii) stronger-than-expected demand from China, iii) higher input costs due to developments in global financial markets, and iv) changes to domestic policy on subsidies and price controls.

Source: BIMB Securities Research - 25 Apr 2023