• Inflation eased to +1.9% YoY in September

• Core inflation stayed at 2.5% YoY, pushing YTD average to 3.3%.

• We anticipate that inflation is likely to ease in the remaining months of 2023 due to diminishing base effect

• We reiterate our CPI forecast for 2023 which is projected to expand by 2.6%, a moderation against 3.3% in 2022

Malaysia’s Consumer Price Index (CPI) rose to 1.9% YoY in September, making thirty-second straight month of inflation since February 2021 - the slowest CPI growth in 2023. Despite the higher base effect from September 2022, the positive growth was primarily driven by sustained foods inflation, and higher services demand domestically. The higher cost pressure of food production and services segment continued to drive up Malaysia's overall inflation in September. Food inflation recorded a 3.9% YoY increase – of the 230 food items, 178 items or 77.4% recorded price increases as compared to September 2022. Nevertheless, core inflation rate stayed at 2.5% YoY.

Urban CPI was ahead of the rural again, reflected by an increase of 1.9% YoY vs. 2.0% in August lifted by Restaurants & Hotels sub-component (September urban: +4.7%; rural: 2.5%) as well as Food & Non-Alcoholic Beverage group (September urban: +4.1%; rural: 2.9%). CPI for the income group below RM3,000 (September: 2.3% YoY) that was slightly above the national average (September: +1.9%) was driven by the F&B (+3.2%) and restaurant and hotels (+4.5%) sub-indexes.

In regards with the escalation of the Middle East conflict, we believe that it carries the potential for a substantial increase in global inflation. Oil prices continued to rise on Friday and were poised for a second consecutive week of increases. This is due to heightened concerns that the Israel-Gaza conflict could spread across the Middle East, potentially disrupting supplies from one of the world's leading production regions. Note that elevated oil prices have the potential to translate into higher gasoline costs for transportation, ultimately leading to increased production expenses for consumer goods. This also might lead to higher food prices. However, we do not anticipate a significant short-term increase in the inflation rate, primarily due to subsidies in Malaysia.

Looking at regional countries, we observe a mixed set of CPI results for the month of September. It's worth noting that Indonesia saw its annual inflation rate decelerate to 2.28% YoY in September, primarily due to a high base effect. Meanwhile, Thailand experienced a further slowdown in headline inflation in September, with an increase of only 0.3% YoY, driven primarily by declining prices in both the food and non-food categories. In contrast, the Philippines witnessed a notable jump in inflation, reaching 6.1% in September. This marks the second consecutive month of rising inflation rates in the country. Additionally, Singapore's core inflation surged to 5.3% in September, largely attributed to significant price increases in food, services, retail, and other goods. In the United States, the largest global economy, inflation remained high in September, registering at 3.7% YoY on the back of elevated gas prices and housing expenses.

These developments suggest that inflationary pressures in some regional economies and US are on an upward trajectory. It's worth noting that these mounting inflationary pressures in both regional nations and the U.S. could have adverse effects on economic growth. Despite the sluggish growth in wages, the surging food costs may have implications for consumer spending and might lead retailers to exercise caution when passing on additional expenses to their customers. We anticipate that inflation is likely to ease in the remaining months of 2023, but core inflation is expected to remain above the long-term average.

OUTLOOK

The Finance Ministry anticipates the economy's growth rate to be just 4% in 2023, which is less than half of the 8.7% seen in 2022. It is also expected to remain in the range of 4% to 5% in 2024. The MoF also predict that Malaysia's inflation rate will range from 2.1% to 3.6% in 2024, partly due to a gradual shift towards targeted subsidy mechanisms. The CPI is expected to trend higher in the 1H24 due to factors driven by demand and improvements in the labor market. The higher inflation outlook is primarily influenced by elevated commodity prices, unfavorable base effects, ongoing weakness in the ringgit and adjustments in some essential food prices.

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 maintained our CPI forecast for 2023 which is projected to expand by 2.6%, a moderation against 3.3% in 2022. At this point, we opine that inflation risks are inclined toward the upside due to both internal and external factors. However, we expect them to remain within manageable levels.

Source: BIMB Securities Research - 23 Oct 2023