• Core inflation eased to 2.5% YoY, pushing YTD average to 3.4%.

• Food inflation moderated further (to 4.1% YoY)

• Adjusted our 2023 forecast for the CPI, reducing it from an initial average of 3.4% to 2.6%.

OVERVIEW

Malaysia’s Consumer Price Index (CPI) rose to 2.0% YoY in August, unchanged against July numbers, making thirty-first straight month of inflation since February 2021 - the slowest CPI growth in 2023. Despite the higher base effect from August 2022, the positive growth was primarily driven by sustained foods inflation, and higher services demand domestically. On a monthly basis, consumer prices rose slightly or by 0.2% MoM compared to July’s 0.1% MoM gains. The higher cost pressure of food production and services segment continued to drive up Malaysia's overall inflation in August. Food inflation recorded a 4.1% YoY increase – of the 230 food items, 185 items or 80.4% recorded price increases as compared to August 2022. Nevertheless, core inflation rate eased to 2.5% YoY after moderating by 0.3ppts in August versus +2.8% YoY in July (average pre-pandemic: +1.7% YoY). The ongoing increase in core CPI indicates the enhancement of consumer purchasing power.

Inflation rate for Transport in August 2023 was on YoY basis, marking the first decrease of -0.4%, last month. The subgroup of Transport Services and Purchase of Vehicles saw increases of 3.5% and 0.7%, respectively. However, the decrease in inflation within the subgroup of Operation of Personal Transport Equipment, at - 0.3%, somewhat offset the overall inflation within this category from rising. 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 -2.8% 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 14-month low to 4.1% YoY (vs 4.4% YoY in July). 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 2.9% YoY (July: 3.0% YoY) and 5.9% YoY (July: 6.2%) respectively. All subgroups in Food & Non-Alcoholic Beverages recorded increases ranging from 1.5% to 5.8%, with Oils & Fats and Vegetables being the only components that recorded a price decrease in August, declining to -1.4% YoY and - 1.1% YoY, respectively.

Urban CPI was ahead of the rural again, reflected by an increase of 2.0% YoY vs. 2.1% in July lifted by Restaurants & Hotels sub-component (August urban: +4.9%; rural: 2.6%) as well as Food & Non-Alcoholic Beverage group (August urban: +4.4%; rural: 3.1%). CPI for the income group below RM3,000 (August: 2.4% YoY) that was slightly above the national average (August: +2.0%) was driven by the F&B (August: +3.4%) and restaurant and hotels (August: +4.8%) sub-indexes. Six states registered CPI that was higher than the national average, led by Sarawak (+3.4%), Wilayah Persekutuan Putrajaya (+2.7%), Perlis (+2.4%), Selangor (+2.3%), Perak (+2.3%), Pahang (+2.2%) and Melaka (+2.1%) pushed primarily by higher F&B cost (W.P. Putrajaya F&B sub-index: +5.7%; Selangor: +5.3%; Sarawak: +5.0%, Perlis: +4.7%, Melaka: +4.4%, Pulau Pinang: +4.2%, Wilayah Persekutuan Labuan: +4.2% and Pahang: +4.1%.

Looking at regional countries, several of them experienced higher CPI figures in August. Notably, Indonesia (August: 3.3%, July: 3.1%), Thailand (August: 0.9%, July: 0.4%), the Philippines (August: 5.3%, July: 4.7%), and the Republic of Korea (August: 3.4%, July: 2.3%) all witnessed an increase in inflation. This indicates that inflationary pressures in these regional nations are trending upwards, which could have unfavorable consequences from a growth perspective. Despite sluggish wage growth, the rising cost of food could impact consumer spending and prompt retailers to exercise caution when passing additional expenses on to customers.

In August, the world largest economy, US experienced its most significant monthly inflationary uptick this year, primarily driven by higher prices in the energy sector and various other commodities. However, a moderate increase in the underlying inflation rate might provide encouragement for the Federal Reserve to maintain its current stance on interest rates. The CPI, a gauge of costs across a wide range of products and services, surged by 0.6% for the month, marking the largest increase since June 2022. On a YoY basis, it climbed to 3.7% after July's 3.2% rate. The headline rate's rise was primarily attributed to a sharp increase in gasoline prices, aligning with the spike in oil prices to their highest levels in a decade.

OUTLOOK

According to the Food and Agriculture Organization of the United Nations, global food inflation continued to decrease, showing a -2.6% YoY decline in August 2023, compared to a 2.1% decline in July 2023. This decline can be attributed to reductions in price indices for dairy products, vegetable oils, meat, and cereals, although the sugar price index saw a moderate increase. In line with this global trend, Malaysia's food inflation also moderated to +4.1% YoY in August (vs 4.4% in July). Looking ahead, we anticipate that Malaysia's domestic food inflation will further slowdown as global commodity prices is expected to experience a mild correction.

In the 2H23, we anticipate that inflation will continue to decrease on the back of diminishing base effect. Due to more noticeable slowdown in prices and a less optimistic view of domestic demand, we've revised our 2023 CPI forecast, moderating it to 2.6% from 3.4% previously. It's important to note that there are still factors that could push inflation higher, especially if the government goes ahead with its subsidy rationalization plan this year.

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 - 25 Sept 2023