• Inflation remained at 2.0%, below market expectations
   
• Core inflation maintained at 1.9%
   
• Higher beverage preparation services drove up restaurant category

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

• Malaysia's PPI up by 1.4%, with growth across most sectors'

Malaysia’s Consumer Price Index (CPI) remained at 2.0% in June 2024, defying market expectations of 2.2%. Food inflation rose to 2.0% – with 151 out of 247 food items (62.8%) seeing price hikes compared to June 2023. Core inflation also increased by 1.9% YoY, unchanged from the previous month.

Urban CPI mirrored the rural CPI, rose by 1.9% YoY in June 2024 spurred by Restaurants & Hotels sub-component (Jun urban: +3.5%; rural: 2.7%); Housing, Water, Electricity, Gas and Other Fuels (Jun urban: + 3.2%; rural: + 3.5%), Personal Care, Social Protection & Miscellaneous Goods & Services (June urban: +2.7%; rural: 2.9%); Health (2.1%) and Recreation, Sport & Culture (2.0%). CPI for the income group below RM3,000 (Jun: 1.8% YoY), unchanged from May, driven by the Restaurants & Hotels (+4.2%), Housing & Utilities (+3.2%), as well as Personal Care Social Protection & Miscellaneous Goods & Services (+2.5%).

Analyzing the CPI sub-components (Table 4), the inflation rise in June 2024 was mainly spurred by Restaurant & Accommodation Services (3.3%); Housing, Water, Electricity, Gas & Other Fuels (+3.2%); Personal Care, Social Protection & Miscellaneous Goods & Services (+2.8%) and Food & Beverages (+2.0%). Inflation for Restaurant & Accommodation Services rose to 3.3% in June (May: 3.2%), driven by a 4.2% increase in Beverage preparation services. Housing, Water, Electricity, Gas & Other Fuels inflation held steady at 3.2%, with the rise largely due to a 32.1% increase in Water supply and related services. In June 2024, the food inflation increased by 2.0% (May: 1.8%). The Food at Home subgroup rose by 0.9% (May:0.5%). Meanwhile, Food Away from Home grew by 3.3%, a slight deceleration from 3.4% in May.

Compared to regional countries, Malaysia’s CPI is lower than inflation rates in the Republic of Korea, Indonesia, and the Philippines. Eurozone inflation increased to 2.5% in June (May: 2.6%), supported by higher food inflation at 2.4% (May: 2.6%) and energy inflation at 0.2% (May: 0.3%). U.S. inflation rate moderated to 3.0% in June (May: 3.3%), driven by increases in food (2.2%), shelter (5.2%), transportation (9.4%), and energy prices (1.0%). The Republic of Korea's inflation rate rose slightly to 2.4% in June (May: 2.7%), primarily due to a slower increase in the food inflation (Jun: 3.8%; May: 5.1%). Indonesia's inflation rate climbed to 2.5% in June (May: 2.8%), propelled mainly by increase in food, housing, and accommodation & restaurants. The Philippines saw a slower rise to 3.7% in June (May: 3.9%), influenced by inflation in housing, transport, alcoholic beverages & tobacco, and clothing. Moreover, Thailand's annual headline inflation rate eased to 0.6% in June (May: 1.5%), driven by a slowdown in food inflation to 0.5% (May: 1.1%) and a decline in Housing inflation to -0.8% (May: 2.1%). Conversely, China’s inflation rose to 0.2% in June 2024. Food inflation fell to -2.1% (May: -2.0%), while non-food inflation increased to 0.8%, unchanged from the previous month.

Malaysia's Producer Price Index (PPI), which measures the prices of goods at the factory gate, rose by 1.4% in May 2024 (Apr: 1.9%). Like the previous month, all sectors recorded an increase. The Mining sector saw a 6.6% rise (Apr: 10.0%), driven by the Extraction of crude petroleum (7.2%) and Extraction of natural gas (4.6%) indices. The Agriculture sector rose slightly by 1.3% (Apr: 5.4%), with the Animal production and Growing of perennial crops indices up by 3.7% and 3.1%, respectively. The Manufacturing sector increased further by 1.0% (Apr: 0.8%), mainly due to the Manufacture of computer, electronic & optical products index, which surged by 9.6%. In the utility sector, the Water supply index went up by 8.7%, and the Electricity & gas supply index increased by 1.5%.

On a monthly basis, the PPI Local Production fell by 0.9% (Apr: 0.5%). The Mining sector dropped by 5.5% (Apr: 2.1%), due to declines in Extraction of crude petroleum (-6.8%) and Extraction of natural gas (-1.7%). The Agriculture sector decreased by 4.6% (Apr: 0.7%), mainly due to a 7.8% drop in Growing of perennial crops. The Manufacturing sector also saw a slight decline of 0.1% (Apr: 0.3%) due to a 2.5% decrease in Manufacture of coke and refined petroleum products. In contrast, the Electricity & gas supply and Water supply indices posted gains of 1.1% and 1.4%, respectively.

OUTLOOK

Most anticipated that the removal of the blanket diesel subsidy in June would push the country's CPI above the previous month's 2% inflation rate. However, Malaysia's inflation in June 2024 held steady at 2%, mainly due to higher costs in restaurants and accommodation, utility bills, and food. The Producer Price Index (PPI) rose by 1.4% in May, easing from the previous month. The impact of the diesel subsidy rationalization, effective June 10, 2024, is partial in June's inflation and is expected to become more pronounced from July onward in the second half of 2024. Nonetheless, the impact will be limited as the diesel subsidy rationalization applies only to Peninsular Malaysia, excluding Sabah and Sarawak, and the diesel constitutes just 0.2% of the CPI basket. Moreover, targeted measures like the diesel fleet card system and cash transfers are expected to mitigate the inflationary effects.

Currently, our 2024 inflation forecast is 2.7% by year-end, with potential for an upward revision based on the government's RON95 subsidy details. Yet, Prime Minister Datuk Seri Anwar Ibrahim recently stated that RON95 subsidy rationalization is not under consideration at this moment. Nevertheless, we anticipate inflation will stay within Bank Negara Malaysia (BNM)’s projected range of 2.0% to 3.5%, factoring in the reduced weight of fuel and lubricants in the CPI basket, which has decreased to 5.9% in 2024 from 8.5% last year. We expect that BNM will maintain the overnight policy rate at 3.00% for the remainder of 2024 while observing the government's subsidy rationalization.

Moving forward, inflation trends will be influenced by policy decisions and global commodity prices. Overall, we are optimistic about Malaysia's economic outlook for 2024, driven by strong domestic spending, improved external demand, a robust labor market, and a strengthening Ringgit in the latter half of the year.
 

Source: BIMB Securities Research - 25 Jul 2024