• Core inflation moderated to 2.4% YoY

• We project inflation to stay within the range of 1.7-2.0% in November and December 2023

• 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 1.8% YoY in October, making thirty-third straight month of inflation since February 2021. Note that this is the slowest CPI growth since April 2021. Despite the higher base effect from October 2022, the notable growth primarily stemmed from the sustained inflation in food prices and increased domestic demand for services. The higher cost pressure of food production and services segment continued to drive up Malaysia's overall inflation in October. Food inflation recorded a 3.6% YoY increase – of the 230 food items, 175 items or 76.1% recorded price increases as compared to October 2022. Nevertheless, core inflation rate was softer at 2.4% YoY.

Urban CPI was ahead of the rural again, stayed at 1.9% YoY in October lifted by Restaurants & Hotels sub-component (October urban: +4.8%; rural: 2.4%) as well as Food & Non-Alcoholic Beverage group (October urban: +3.7%; rural: 2.6%). CPI for the income group below RM3,000 (October: 2.0% YoY) that was slightly above the national average (October: +1.8%) was driven by the Restaurants & Hotels (+4.4%), Food & Non-Alcoholic Beverages (+2.8%) and Miscellaneous Goods & Services (+2.3%) sub-indexes.

The F&B component saw a moderated increase of 3.6%. The food at home component experienced a slower rise of 2.1%, and the food away from home component showed a lower increase at 5.6%. Despite the moderation in the food inflation rate within the F&B segment, we remain cautious due to the current weakness of the Ringgit, particularly against major currencies like the USD, which might escalate the cost of food imports. The national currency has reached levels unseen since Malaysia grappled with the Asian Financial Crisis 25 years ago. Hence, we think that prolonged depreciation of the Ringgit may lead to higher raw material costs and eventually push food inflation upward.

Looking at regional countries, we observe a mixed set of CPI results for the month of October. Note that Indonesia experienced a rise in its annual inflation rate, reaching 2.56% in October. This uptick was driven by increased prices for rice, chicken meat, cigarettes, and home rental costs. In Singapore, core inflation saw a YoY increase to 3.3% in October, attributed to higher inflation in services, retail, and other goods, along with elevated electricity and gas costs. Conversely, Thailand's CPI contracted by 0.31% in October compared to the same period last year. This decline in headline inflation is linked to reduced prices for energy and consumer goods, influenced by the government's cost-cutting measures, as well as lower prices for pork and fresh vegetables compared to the previous year. In contrast, the Philippines experienced a decrease in inflation to 4.9% in October, primarily due to lower food prices contributing to downward price pressures. In the United States, inflation showed signs of easing in October. The overall CPI slowed to 3.2% YoY, the most modest since July. This deceleration can be attributed in part to more moderate energy prices.

We've observed that one of the factors that reduced the inflation rates in some countries is the downward pressure on prices stemming from declining energy costs. The volatility of energy prices can significantly influence inflation readings. To recap, energy prices experienced a spike in early 2022 due to the Russia-Ukraine War, which had immediate and dramatic effects on global markets. The surge in energy prices directly impacted consumers and industries with energy-intensive costs. However, we believe that the energy supply has begun to stabilize, and we anticipate this trend to persist in the future.

OUTLOOK

Due to the decelerating impact of demand-pull inflation and the effects of interest rate normalization, inflation is anticipated to remain subdued until early months of 2024. We project inflation to stay within the range of 1.7-2.0% in November and December 2023. Note that, the government anticipates inflation to fall within the range of 2.1% to 3.6% in 2024. The broad spectrum indicates the gradual transition toward a targeted subsidy mechanism, slated for implementation in 2024. Currently, we are in a wait-and-see mode for more information, including the effective date of the government's subsidy rationalization program.

All in all, we maintain 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 - 27 Nov 2023