• Inflation Persisted at 1.8% for the Third Consecutive Month
   
• Core Inflation Rose to 1.9%
   
• Rise in Beverage and Accommodation services boosted the Restaurants category

• Our CPI forecast for 2024 maintained at 2.7%

• Malaysia's PPI surged, buoyed by growth across most sectors

Malaysia’s Consumer Price Index (CPI) maintained at 1.8% YoY in April 2024. Food inflation recorded a 2.0% YoY increase – of the 247 food items, 156 items or 63.2% saw price increases compared to April 2023, while the core inflation rate increased by 1.9% YoY.

Urban CPI mirrored the rural CPI, rose by 1.8% YoY in April 2024 spurred by Restaurants & Hotels sub-component (April urban: +3.6%; rural: 2.9%); Personal Care, Social Protection & Miscellaneous Goods & Services (April urban: +3.1%; rural: 3.3%) as well as Housing, Water, Electricity, Gas and Other Fuels (April urban: +3.0%; rural: +3.4%). CPI for the income group below RM3,000 (April: 1.8% YoY) tad higher than March rate, driven by the Restaurants & Hotels (+3.9%), Housing, Water, Electricity, Gas & Other Fuels (+3.4%), Personal Care, Social Protection & Miscellaneous Goods & Services (+2.8%) as well as Health (+2.1%).

Analyzing the CPI sub-components (Table 4), the inflation rise in April 2024 was mainly propelled by Restaurants and accommodation services (+3.5%); Personal Care, Social Protection & Miscellaneous Goods & Services (+3.1%) and Housing, water, electricity, gas, and other fuels (+3.0%). Other items contributing to the reading included Personal Care, Social Protection & Miscellaneous Goods & Services (+2.3%), Recreation, Sport & Culture (+2.0%) along with Education (+1.4%) and others. In contrast, Communication experienced a decline (-2.5%), while Clothing & Footwear decreased by 0.3%. The 3.5% inflation increase in Restaurants and accommodation services (Mar: 3.0%) was driven by an increase in the main subgroup of Beverage preparation services, at 3.9% (Mar: 3.7%) and Accommodation services, at 2.4% (Mar: 0.6%). Food inflation, accounting for 29.8% of the total Consumer Price Index (CPI) weight, marked an increase of 2.0% (Mar: 1.7%). The primary subgroup of Food at home rose to 0.4% in April (Mar: 0.3%). Simultaneously, the primary subgroup of Food away from home rose to 4.0% (Mar: 3.5%).

Considering inflation trends across regional countries, we observe CPI is generally higher across regional countries, except for China and Thailand. Eurozone inflation maintained at 2.4% in April (Mar: 2.4%), steered by a moderate food inflation of 2.8% (Mar: 2.6%). U.S. inflation rate moderated to 3.4% in April (Mar: 3.5%), driven by increased shelter and energy prices. Compared to selected countries in the Asia Pacific region, Malaysia experienced a lower inflation rate of 1.8% than in South Korea, Indonesia, and the Philippines. The Republic of Korea's inflation rate eased to 2.9% in April, attributed partly to a rise in food inflation to 5.9% (Feb: 6.7%). Indonesia's inflation rate climbed to 3.0% in April (Mar: 3.1%). This increase was mainly bolstered by inflation in Food, Health, and Accommodation & Restaurants. Philippines witnessed an increase to 3.8% in April (Mar: 3.7%), propelled by higher inflation in Food, Transport, Recreation, sport & culture, as well as Restaurants & Accommodation Services. Moreover, Thailand's annual headline consumer inflation rate rebounded to 0.2% in April (Mar: -0.5), attributed to food inflation, which rose to 0.3% in April (Mar: -0.6%). Plus, Transport increased to 0.9% (Mar: 0.4%). Conversely, inflation in China rose by 0.3% in April (Mar: 0.1%), food inflation decreased to -2.7% (Mar: -2.7%), while non-food inflation increased by 0.9% (Mar: 0.7%).

Malaysia's Producer Price Index (PPI), which measures the prices of goods at the factory gate, rose by 1.6% in March 2024 (Feb: 0.3%). All sectors saw growth in March 2024, contributing to the overall increase in the index. The Mining sector rose by 8.3% in March 2024 (Feb: 5.3%), driven by an 11.0% increase in the index for crude petroleum extraction. Meanwhile, the Agriculture sector grew by 5.5% in March 2024 (Feb: 6.0%), with the index for growing perennial crops rising by 9.0%. The Manufacturing sector saw a slight increase of 0.6% (Feb: -0.7%), steered by a 6.8% rise in the manufacture of computer, electronic, and optical products. In the utility sector, the indices for electricity and gas supply and water supply increased by 0.1% and 6.0%, respectively.

On a monthly basis, PPI surged by 1.6% in March 2024 (Feb: 0.7%), with contributions from all sectors. The agriculture sector climbed by 4.3% in March 2024 (Feb: 2.6%). The Mining sector also experienced a 2.3% rise in March 2024 (Feb: 5.7%). Additionally, the Manufacturing sector saw a 1.3% growth after remaining unchanged in the previous month. Meanwhile, the Electricity & Gas Supply index grew by 0.5%, and the Water Supply index inclined by 2.1%, respectively.

OUTLOOK

Malaysia’s headline inflation held steady at 1.8% YoY in April, same rate as in March and February, offering reassurance that inflation is being managed despite concerns about potential subsidy reductions. Malaysia's inflation rate was slightly lower than anticipated, with rises in restaurant prices and more expensive personal care products offset by reduced costs in communication and clothing. The Producer Price Index (PPI) increased sharply to 1.6% in March, maintaining its upward trajectory from the previous month. Even with the PPI rise, we expect a gradual transmission of costs, which should align with the stable trend in the CPI.

Our outlook remains optimistic for moderate inflationary pressure in the first half of 2024. This expectation is bolstered by improvements in domestic supply chains, steady interest rates, and stabilized global commodity prices. Despite the cooling inflation trend in Malaysia, we expect increased pressures on global supply chains due to ongoing tensions in the Middle East. The recent passing of Iran's President Raisi has introduced a sense of uncertainty regarding the country's future leadership, further complicating tensions in the Middle East, which are already strained by the crisis in Gaza.

Malaysia has maintained one of the lowest inflation rates in the region, largely attributed to government subsidies on essential items such as fuel, which have effectively kept prices under control. The upcoming shift from the existing blanket fuel subsidies to targeted ones significantly influences the inflation forecast. The government's announcement of starting subsidy reductions with diesel lacks a specified timeline, adding to the uncertainty surrounding inflation expectations.

Our CPI forecast for 2024 remains unchanged at 2.7%, subject to the successful rollout of the subsidy rationalization program.

Prime Minister Datuk Seri Anwar Ibrahim highlighted that the initiative would commence by rationalizing diesel fuel, starting with Peninsular Malaysia. No specific details regarding the implementation date and how will the diesel subsidy rationalisation be implemented, but it was mentioned that the removal of the diesel subsidy would impact only T20 users and approximately 3.8mn foreigners. The reduction in diesel subsidy is anticipated to raise transportation costs, potentially causing inflation through increased prices for goods and services. However, the PM said that eligible owners of private vehicle using diesel (such as small farmers, rice farmers and small traders) will receive financial aid, in addition to the 10 types of public transport vehicles and 23 types of logistical vehicles (or commercial goods transport vehicles) that are identified under the Subsidized Diesel Control System (SKDS). Hence, we foresee a manageable impact, given the government's commitment to enhancing the Subsidised Diesel Control System 2.0 (SKDS 2.0) program continually to maintain stable inflation. Yet, the focus shifts to the widely used RON95 subsidy program, with imminent implementation expected. The diesel subsidy reform's success will pave the way for RON95 reform. Going forward, the inflation trajectory will depend on policy elements and global commodity prices. Overall, we are optimistic about Malaysia's economic outlook for 2024, primarily due to robust domestic spending and ongoing enhancements in external demand.

Source: BIMB Securities Research - 27 May 2024