• Inflation Rose to 2.0% From 1.8% in the Previous Three Months.
   
• Core Inflation Persisted at 1.9%
   
• Rise in water supply & miscellaneous services boosted the Housing category

• Our forecast for 2024's inflation remains at 2.7%, with a potential for upward revision

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

OVERVIEW

Malaysia’s Consumer Price Index (CPI) increased to 2.0% in May 2024 from 1.8% in the preceding three months, surpassing market expectations of 1.9%. This rise marks the highest level since August 2023. Food inflation recorded a slower rise to 1.8% – of the 247 food items, 151 items or 61.1% experienced a price increase compared to May 2023, while the core inflation rate increased by 1.9% YoY.

Urban CPI surpassed the rural CPI, rose by 1.9% YoY in May 2024 spurred by Restaurants & Hotels sub-component (May urban: +3.3%; rural: 2.9%); Housing, Water, Electricity, Gas and Other Fuels (May urban: + 3.2%; rural: + 3.5%), Personal Care, Social Protection & Miscellaneous Goods & Services (May urban: +3.0%; rural: 3.2%); Health (2.5%) and Recreation, Sport & Culture (2.0%). CPI for the income group below RM3,000 (May: 1.8% YoY) the same as April’s rate, driven by the Restaurants & Hotels (+4.0%), Housing, Water, Electricity, Gas & Other Fuels (+3.2%), Personal Care, Social Protection & Miscellaneous Goods & Services (+2.6%) as well as Health (+2.1%).

Analyzing the CPI sub-components (Table 4), the inflation rise in May 2024 was mainly spurred by Housing, water, electricity, gas, and other fuels (+3.2%); Restaurants and accommodation services (+3.2%); Personal Care, Social Protection & Miscellaneous Goods & Services (+3.0%). Inflation for Housing category rose to 3.2% (Apr: 3.0%), driven by Water supply & miscellaneous services (32.1%). Inflation for Restaurant & Accommodation Services increased to 3.2% (Apr: 3.5%) due to Beverage preparation services (4.1%). Meanwhile, inflation for Personal Care, Social Protection & Miscellaneous Goods & Services was at 3.0% (Apr: 3.1%), with Jewelry & watches contributing 16.5%. Food inflation, accounting for 29.8% of the total Consumer Price Index (CPI) weight, marked a moderate rise of 1.8% (Apr: 2.0%). The primary subgroup of Food at home increased slightly to 0.5% in May 2024 (Apr: 0.4%). Simultaneously, the primary subgroup of Food away from home rose to 3.4% (Apr: 4.0%).

Considering inflation trends across regional countries, we observe Malaysia’s CPI is lower than the inflation in the Republic of Korea, Indonesia, and Philippines. Eurozone inflation rose to 2.6% in May (Apr: 2.4%), bolstered by increases in energy inflation to 0.3% (Apr: -0.6%) and services to 4.1% (Apr: 3.7%). However, food inflation eased to 2.6% (Apr: 2.8%). U.S. inflation rate moderated to 3.3% in May (Apr: 3.4%), driven by increases in shelter, transportation, and energy prices. The Republic of Korea's inflation rate eased to 2.7% in May (Apr: 2.9%), primarily due to the slower increase in the food inflation (May: 5.1%; Apr: 5.9%). Indonesia's inflation rate climbed to 2.8% in May (Apr: 3.0%), propelled mainly by inflation in food, health, and accommodation & restaurants. Philippines witnessed an increase to 3.9% in May (Apr: 3.8%), steered by inflation in food, transport, recreation, sport & culture, as well as restaurants services. Moreover, Thailand's annual headline consumer inflation rate surged to 1.5% in May (April: 0.2%), driven by food inflation and transport, which increased to 1.1% and 2.4%, respectively. On the contrary, inflation in China remained stable at 0.3% in May (April: 0.3%), with food inflation declining to -2.0% (April: -2.7%), while non-food inflation increased by 0.8% (April: 0.9%).

Malaysia's Producer Price Index (PPI), which measures the prices of goods at the factory gate, grew by 1.9% in April 2024 (Mar: 1.6%). Every sector experienced growth, which collectively boosted the overall index. The Mining sector continued its upward trend with a 10.0% increase (Mar: 8.3%), driven by a 12.3% rise in crude petroleum extraction. Meanwhile, the Agriculture sector grew by 5.4% in April 2024 (Mar: 5.5%), with the index for perennial crops rising by 9.2% and animal production increasing by 2.9%. Simultaneously, the Manufacturing sector saw a slight increase of 0.8% (Mar: 0.6%), driven by an 8.9% rise in the index for the manufacture of computer, electronic, and optical products. In the utility sector, the Electricity and gas supply index rose by 1.0%, while the Water supply index increased by 7.2%.

On a monthly basis, PPI increased by 0.5%, down from 1.6% in March 2024. The Mining sector climbed by 2.1% (Mar: 2.3%), steered by a 2.7% rise in the crude petroleum extraction index. The agriculture sector also grew at a slower pace of 0.7% (Mar: 4.3%), supported by a 1.3% increase in the index for growing perennial crops. Similarly, the Manufacturing sector increased marginally by 0.3% (Mar: 1.3%), propelled by a 1.4% rise in the manufacture of computer, electronic, and optical products. Meanwhile, the indices for electricity and gas supply and Water supply rose by 0.3% and 1.1%, respectively.

OUTLOOK

Malaysia’s headline inflation accelerated at a slightly faster-than-expected pace in May, mainly driven by higher utility bills, although food inflation decelerated. The Producer Price Index (PPI) marginally increased to 1.9% in April, continuing its upward trend from the previous month.

Our current forecast has taken into account the modest inflationary pressure in the first five months of 2024. This expectation is supported by improvements in domestic supply chains, stable interest rates, stabilized global commodity prices and high base effect. However, we anticipate that the impact of diesel subsidy rationalization, which took effect on June 10, 2024, will become more pronounced in the second half of 2024. The impact of diesel subsidy rationalization is expected to be temporary, like the one-off impact seen with the Goods and Services Tax (GST) in April 2015, which normalized after three months of implementation. Moreover, the impact will be limited as diesel subsidy rationalization is only implemented in Peninsular Malaysia, exempting Sabah and Sarawak. We believe that targeted subsidy disbursement methods like the diesel fleet card system and cash transfers will help cushion the impact on inflation.

Currently, our forecast for 2024's inflation remains at 2.7%, with a potential for an upward revision. For 2024, BNM projects headline inflation to remain moderate, ranging between 2% to 3.5%. These projections reflect stabilizing demand and contain cost pressures, with potential upside from fuel subsidy rationalization implementation. 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, ongoing enhancements in external demand, and a strengthening Ringgit in the second half of 2024.

Source: BIMB Securities Research - 26 Jun 2024