• Inflation Stayed at +1.5% YoY in January
   
• Core Inflation Moderated to 1.8%
   
• Restaurant and hotel sub-segment is expected to continue its increase

• We reiterate our CPI forecast for 2024, expected to increase to 2.7%

OVERVIEW

Malaysia’s Consumer Price Index (CPI) stayed at 1.5% YoY in January 2024, the same rate since November 2023. This marks the thirty-sixth consecutive month of inflation, beginning from February 2021. Food inflation recorded a 2.0% YoY increase – of the 247 food items, 160 items or 64.8% recorded price increases as compared to January 2023. Nevertheless, core inflation rate was softer at 1.8% YoY.

Urban CPI was ahead of the rural again, remained at 1.5% YoY in January 2024 supported by Restaurants & Hotels sub-component (January urban: +3.4%; rural: 2.2%) as well as Health (January urban: +2.6%; rural: +1.3%). CPI for the income group below RM3,000 (January: 1.6% YoY) that was slightly above the national average (January: +1.5%) was driven by the Restaurants & Hotels (+3.4%), Housing, Water, Electricity, Gas & Other Fuels (+2.2%), Health (+2.1%) as well as Food & Beverages (+1.8%).

Referring to the CPI sub-components (Table 3), it's apparent that the restaurant and hotel category consistently exhibits the highest inflation rate compared to others. Going ahead, we anticipate this sub-segment to maintain its inflation rate in line with the SST increase to 8%, which effective from March. It's worth noting that the president of the Malaysian Hotel Association (MAH) mentioned that, Malaysia offers some of the lowest hotel room rates in the Southeast Asian region. We believe that with the currency hitting a new all-time low against the USD, there will likely be a higher influx of tourists into Malaysia, leading to increased demand for hotels and subsequently driving up hotel prices even further.

Looking at the inflation trends across regional countries, we note a more moderate CPI outcome at the beginning of 2024. In China, the inflation rate decreased in January, with the CPI dropping by 0.8% YoY. Meanwhile, the core CPI, excluding food and energy, saw a 0.4% increase from the previous year, while the PPI experienced a 2.5% decrease, indicating a decline in producer prices. Indonesia saw a relaxation in its inflation rate to 2.57% in January, with core inflation, excluding government-controlled prices and volatile food prices, cooling to 1.68% from 1.80% in the previous month, slightly below the anticipated rate of 1.76%. Thailand witnessed its lowest annual headline consumer inflation rate in 35 months in January, with a 1.11% decline in the CPI from a year earlier, driven by government energy subsidies, reduced food prices, and a high base effect from the previous year. South Korea experienced a third consecutive monthly decline in headline inflation, reaching a six-month low in January, primarily due to declining oil prices. Consumer prices rose by 2.8% YoY, the slowest pace since July 2023, marking a continuous easing from 3.2% in December last year, 3.3% in November, and 3.8% in October. Despite these trends, the government has cautioned about a potential rebound in inflation in the coming months.

OUTLOOK

Examining the current inflation trend, we see an improvement in cost pressures as another factor contributing to the moderation of CPI inflation. Despite Malaysia's sustained low inflation rates, we anticipate potential escalation in global supply chain pressures due to geopolitical tensions in the Red Sea, potentially resulting in increased food inflation in Malaysia, given its reliance on food imports. The ongoing security crisis in the Red Sea is expected to further strain global supply chains in 2024, impacting a significant portion of global trade and posing a substantial threat to Asia-Europe shipping routes.

With the declining trend observed in the PPI, we attribute the PPI deflation to normalized commodity prices and intermediate goods, which partially accounts for the easing prices of several finished goods. Looking ahead, based on the trend in the PPI, we anticipate the CPI to follow a similar trajectory in the coming months, especially in the 1H24. However, we expect the outcomes of fuel subsidy rationalization to impact inflation in the second half of the year.

The government has provided a wider inflation forecast range of 2.1-3.6%, depending on fuel subsidy reforms. Our forecast of 2.7% falls in the mid-point of this range and considers the impact of the 2% increase in service tax from March 2024 but does not include the effects of other domestic price policy changes, particularly subsidy rationalization and the progressive wage mechanism. All in all, we maintain our CPI forecast for 2024, expecting an increase to 2.7% with risks skewed to the upside. The magnitude of the upside risks would hinge on the implementation of the policy revisions, potentially in 2H24.

Source: BIMB Securities Research - 26 Feb 2024