• Inflation grew by +1.8% YoY in February
   
• Core inflation remained at 1.8%

• Adjusted water tariffs drove the Housing and Water category up

• We maintain our CPI forecast for 2024, anticipating an increase to 2.7%

• Malaysia's PPI continued to decline in January, with most sectors experiencing negative growth except for Agriculture and Water supply

OVERVIEW

Malaysia’s Consumer Price Index (CPI) rose by 1.8% YoY in February 2024. Food inflation registered a 1.9% YoY increase – of the 247 food items, 152 items or 61.5% experienced price hikes compared to February 2023. Nevertheless, core inflation rate was maintained at 1.8% YoY.

Urban CPI mirrored the rural CPI, both rising by 1.7% YoY in February 2024 supported by Restaurants & Hotels sub-component (February urban: +3.0%; rural: 2.7%) as well as Housing, Water, Electricity, Gas and Other Fuels (February urban: +2.7%; rural: +2.7%). CPI for the income group below RM3,000 (February: 1.7% YoY) was spurred by the Restaurants & Hotels (+3.2%), Housing, Water, Electricity, Gas & Other Fuels (+2.9%), Personal Care, Social Protection & Miscellaneous Goods & Services (+2.2%) as well as Health (+2.1%).

Looking into the CPI sub-components (Table 3), the inflation increase in February 2024 was primarily driven by the Housing, water, electricity, gas, and other fuels group (+2.7%); Recreation, sport, and culture group (+1.6%); followed by the transport group (+1.2%). The 2.7% inflation increase in Housing, water, electricity, gas, and other fuels (Jan: 2.0%) was mainly due to a significant rise of 29.7% in the water supply and miscellaneous services subgroup (Jan: 9.3%). The increase was due to adjusted water tariffs implemented via the Tariff Setting Mechanism (TSM) for domestic users in Peninsular Malaysia and Labuan Federal Territory, effective from February 1, 2024. Concurrently, the food inflation, accounting for 29.8% of the total Consumer Price Index (CPI) weight, saw a slower increase of 1.9% (Jan: 2.0%).

Considering inflation trends across regional countries, we note that CPI has started to pick up pace in regional countries. The inflation rate in South Korea surge to 3.1% in February 2024 (Jan:2.8%), driven by an increase in the food inflation to 6.9% (Jan: 5.9%). Indonesia's inflation rate rose modestly to 2.8% in February 2024 (Jan: 2.6%). This increase was mainly steered by higher prices in food inflation (Feb:6.4%, Jan: 5.8%); Health (Feb:2.0%, Jan: 1.9%), and Transport (Feb:1.4%, Jan: 1.1%). Philippines witnessed an increase to 3.4% in February (Jan: 2.8%), spurred by higher food inflation and Housing & Utilities costs. Conversely, Thailand's annual headline consumer inflation rate fell again to -0.8% in February (Jan: -1.1). The decline was attributed to food inflation, which fell further to -1.0% in February 2024 (January: - 1.1%). Additionally, prices continued to drop for non-food products at -0.6% (Jan: - 1.1%).

Malaysia's Producer Price Index (PPI), which measures the prices of goods at the factory gate, continued its downward trend, recording a decrease of 0.6% in January 2024 (Dec: -1.3%). The drop was mainly influenced by the Mining sector, which saw a decline of 1.3% (Dec: -3.4%), impacted by the decrease in the Extraction of natural gas index (-6.8%). The Manufacturing sector declined by 0.9% (Dec: - 1.5%), due to drops in indices for coke & refined petroleum (-11.3%) and food products (-3.6%). The Electricity & gas supply sector also plunged by 0.8% (Dec: - 0.6%). Conversely, the Agriculture, forestry & fishing sector rose by 3.2% (Dec: 1.3%), driven by increases in the indices for Animal production (5.4%) and Growing of perennial crops (3.6%). Simultaneously, the Water Supply sector showed a slight increase of 0.6% (Dec: 0.4%).

On a monthly basis, PPI dropped by negative 0.1% (Dec: -0.2%). The Mining sector experienced a 0.7% decrease (Dec: -1.6%), primarily due to declines in natural gas extraction by 1.4% and crude petroleum extraction by 0.4%. Similarly, the Manufacturing sector fell by 0.2% (Dec: -0.1), driven by declines in Coke & Refined Petroleum (-1.3%) and Computer & Electronic Products (-0.1%) indices. Contrarily, Agriculture, forestry & fishing grew by 2.0% (Dec: 0.0%), driven by increases in Growing of perennial crops (3.2%) and Growing of non-perennial crops (2.3%). Meanwhile, the utility sector saw gains in Electricity & gas supply (Jan: 0.1%; Dec: - 0.3) and Water supply (Jan: 0.3%; Dec: -0.4).

OUTLOOK

After stabilizing at 1.5% YoY for three consecutive months, headline inflation surprised on the upside at 1.8% YoY in February. The higher inflation reading was primarily attributed to the impact of the new water tariff and increased spending during the Chinese New Year (CNY). In January, the Producer Price Index (PPI) experienced a 0.6% decrease, reflecting ongoing deflationary trends in the index. Therefore, we anticipate a gradual reduction in the cost-passing effect as cost inflation moderates, consistent with the cooling trend observed in the CPI.

We anticipate low inflationary pressure to persist until the first half of 2024, driven by improved domestic supply chains, stable interest rates, and normalized global commodity prices. Regardless of Malaysia's cooling inflation trend, we expect increased global supply chain pressures from ongoing Red Sea tensions to potentially raise food inflation due to Malaysia's reliance on food imports. The Red Sea security crisis is expected to strain global supply chains in 2024, particularly impacting Asia-Europe shipping routes. The declining trend in the PPI is attributed to normalised commodity prices and intermediate goods, contributing to deflation in the PPI and easing prices for finished goods.

BNM anticipates moderate inflation in 2024 with subdued pressures. Headline inflation is expected to remain moderate, with CPI forecasted to increase by 2-3.5% in 2024 from 2.5% in 2023. Our 2.7% forecast considers the 2% service tax increase from March 2024 but excludes other domestic price policy changes like subsidy rationalisation and the progressive wage mechanism. Overall, we maintain our CPI forecast for 2024, anticipating an increase to 2.7% with risks tilted towards the upside. The extent of the upside risks would depend on the implementation of policy revisions, potentially in the second half of 2024. While tax adjustments and utility tariff changes may have a slight impact, they are not expected to be major factors driving overall inflation.

We anticipate that the effects of fuel subsidy rationalisation will impact inflation in the second half of the year. The introduction of targeted fuel subsidies could lead to higher retail fuel prices, while the progressive wage model's implementation may impact the inflation rate in the second half of 2024. Global supply chain pressures may escalate due to geopolitical tensions in the Red Sea and bottlenecks in the Suez Canal, potentially increasing volatility in global energy supplies and prices. However, based on the PPI trend, we expect a minimal cost pass-through to end consumers in 1H24.

Source: BIMB Securities Research - 26 Mar 2024