• Inflation eased to +2.0% YoY; +0.1% MoM in July

• Core inflation remained elevated at 2.8% YoY, pushing YTD average to 3.5%.

• Food and transport inflation pulled back to a 13-month low (to 4.4% YoY)

• Maintain our inflation projection at 3.4% for 2023 which is within BNM’s projection.

OVERVIEW

Malaysia’s Consumer Price Index (CPI) rose a tad slower to 2.0% YoY in July compared to 2.4% YoY in June. This was the thirtieth straight month of inflation since February 2021 and the slowest in 2023. Inflation for July was primarily driven by sustained foods inflation, and resurgence in demand. On a monthly basis, consumer prices rose slightly or by 0.1% MoM compared to June’s 0.2% MoM gains. The higher cost of food production continued to drive up Malaysia's overall inflation in June though at a slower pace. Food inflation recorded a 4.4% YoY increase – of the 230 food items, 185 items or 80.4% recorded price increases as compared to July 2022. Nevertheless, core inflation rate eased to 2.8% YoY after moderating by 0.3ppts in July versus +3.1% YoY in June (average pre-pandemic: +1.7% YoY). The ongoing increase in core CPI indicates the enhancement of consumer purchasing power.

The inflation rate for Transport in July 2023 has shown a rare decline of -0.4%, marking the first decrease since March 2021. This reduction was predominantly influenced by a negative rate of -0.8% in the subgroup related to Operation of personal transport equipment. Nevertheless, increases seen in the subgroups of Transport services (1.4%) and Purchase of vehicles (1.3%) somewhat balanced out the overall inflation trend of this category, preventing a substantial decline in its inflation rate. This is attributed to the reduction in costs associated with fuels and lubricants for personal transportation equipment, along with the availability of more affordable transport services. Growth in fuel prices contracted further by - 3.7% YoY. We think this aligns with the stabilization of commodity prices and influenced by high base effects. The government's planned rationalization of subsidies, which may encompass fuel prices, could potentially exert inflationary pressure.

Food inflation recorded slowest gain in 2023. The index for Food & Non-Alcoholic Beverages (FNAB), which contributes 29.5% of CPI weight eased to a 13-month low to 4.4% YoY (vs 4.7% YoY in June). The increase in this group was in tandem with slower increase in the components of food at home and food away from home. These components increased by 3.0% YoY (June: 3.2% YoY) and 6.2% YoY (Jun: 6.8%) respectively. All subgroups in food & non-alcoholic beverages recorded increases ranging from 0.1% to 6.3%, while Oils & fats was the only component that recorded a decrease in price in July, down to -2.2% YoY.

Urban CPI was ahead of the rural again, reflected by an increase of 2.1% YoY vs. 1.9% with both equally lifted by Restaurants & Hotels sub-component (July urban: +5.3%; rural: 2.6%) as well as Food & Non-Alcoholic Beverage group (July urban: +4.6%; rural: 3.2%). CPI for the income group below RM3,000 (July: 2.4% YoY) that was slightly above the national average (July: +2.0%) was driven by the F&B (July: +3.5%) and restaurant and hotels (July: +4.8%) sub-indexes. Six states registered CPI that was higher than the national average, led by Sarawak (+2.6%), Pahang (+2.6%), Wilayah Persekutuan Putrajaya (+2.6%), Selangor (+2.4%), Perak (+2.4%) and Melaka (+2.2%) pushed primarily by higher F&B cost (W.P. Putrajaya F&B sub-index: +6.0%; Selangor: +5.6%; Sarawak: +5.5%, Pahang; +4.8%, Perak; +4.5% and Melaka; +4.4%.

Global inflationary forces are on the upward trend, leading to adverse implications from growth perspective. Despite sluggish wage growth, food prices are on the rise, potentially affecting consumer spending and causing retailers to be cautious about transferring additional expenses to customers.

In US, world largest economy, CPI showed a slight increase after experiencing 12 consecutive months of declines. Core inflation saw its smallest monthly rise in almost two years, indicating that the Federal Reserve's efforts to raise interest rates have been effective in moderating price growth. The CPI saw a 0.2% MoM increase in July, aligning with the consensus forecast. On an annual basis, the CPI climbed by 0.2 percentage points to reach 3.2%. However, this increase was influenced by unfavorable base-effects resulting from a significant drop in energy prices in July 2022. Despite this, the current figure remains significantly lower than last year's peak of 9.1%, although it still exceeds the Federal Reserve's target inflation rate of 2%.

OUTLOOK

The government's actions to address the elevated cost of living, coupled with monetary normalisation by the BNM, have led to a decrease in the country's inflation rate. Note that in the second quarter, Malaysia's economic growth reached its lowest point in nearly two years due to declining exports and a global economic slowdown. Malaysia’s GDP expanded at a more restrained rate of 2.9% YoY compared to the previous quarter's 5.6% growth. This 2.9% YoY growth is the slowest pace since the third quarter of 2021, which saw a contraction of -4.2%. As a result, growth rate for the first half of 2023 stands at 4.3%, in contrast to the 6.8% growth recorded in the first half of 2022.

Going ahead, factors pressuring supply are anticipated to moderate. This could be influenced by a few factors namely the expected strengthening of the Malaysian Ringgit as well as improved flows within the supply chain. We observed that the main factor causing inflationary environment in the country is demand pull interplay. Spending power in the country remains resilient at the back of unemployment that remained low at 3.4% in June. In view of these, we maintain our inflation forecast of 3.4% for 2023 at this juncture.

Upside risks: i) Multi-crisis in the world worsening, ii) prolong weakening in the Ringgit against USD and other major currencies, iii) potential negative impact from El-Nino phenomenon and iv) implementation of subsidy rationalization not done in a timely and proper manner

Source: BIMB Securities Research - 28 Aug 2023