• Inflation remained steady at 2%, unchanged since May
   
• Core inflation maintained at 1.9%
   
• Higher beverage preparation services boosted the Restaurant category, consistent with previous month

• Malaysia's PPI rose 1.6% in June 2024, with all sectors up since March

• Our year-end 2024 inflation target remains at 2.7%, with potential for a downward revision

OVERVIEW

Malaysia’s Consumer Price Index (CPI) in July 2024 increased by 2.0%, unchanged since May and slightly below market expectations of 2.1%. Food inflation saw a moderate rise to 1.6% – with 147 out of 247 food items (59.5%) seeing price hikes compared to July 2023. Core inflation increased by 1.9% YoY, remaining unchanged from the previous month.

Urban CPI ahead of the rural CPI, rose by 2.0% YoY in July 2024 spurred by Restaurants category (Jul urban: +3.5%; rural: 2.9%); Utilities category (Jul urban: + 3.2%; rural: + 3.5%), Personal Care group (Jul urban: +3.2%; rural: 3.1%); Recreation, Sport & Culture (2.4%) and Health (2.2%). CPI for the income group below RM3,000 (Jul: 1.8%), unchanged from April, driven by the Restaurants category (+4.3%), Utilities (+3.2%), as well as Personal group (+2.6%).

Analyzing the CPI sub-components (Table 4), the inflation increase in July 2024 was primarily driven by rises in key categories: Restaurant category (3.4%); Personal Care group (3.2%); Recreation, Sport & Culture (2.2%); and Health (1.9%). Inflation for Restaurant category inclined to 3.4% in July (Jun: 3.3%), driven by a 4.3% increase in Beverage preparation services. Personal Care group inflation climbed to 3.2% (Jun: 2.8%), with Jewelry & watches inflation surging to 18.1% (Jun: 15.3%). In contrast, food inflation (1.6%) experienced a slower rise compared to the previous month. The Food at Home subgroup rose by 0.3% (Jun:0.9%). Conversely, the Food Away from Home subgroup saw a slower rise of 3.2%, compared to 3.3% in the prior month.

Compared to regional countries, Malaysia’s CPI is lower than inflation rates in the Philippines, Republic of Korea, Eurozone and Indonesia. Eurozone inflation increased to 2.6% in July (Jun: 2.5%), spurred by higher energy inflation at 1.2%, while food inflation moderated to 2.3%. The U.S. inflation rate eased to 2.9% (Jun: 3.0%), with transportation and shelter inflation moderating to 8.8% and 5.1%, respectively, whereas food inflation remained steady at 2.2%. Furthermore, inflation in the Republic of Korea rose to 2.6% (Jun: 2.4%), boosted by an increase in the transport group inflation rate to 5.2% (Jun: 3.9%). Indonesia's inflation rate grew moderately to 2.1% from 2.5% in June, primarily driven by food inflation at 3.7%, health inflation at 1.8%, and transport inflation at 1.2%. The Philippines surged to 4.4% (Jun: 3.7%), driven by higher inflation in housing category at 2.3%, food at 6.4% (June: 6.1%), and transport at 3.6%. Moreover, Thailand's annual headline inflation rate inclined to 0.8% (Jun: 0.6%), driven by an increase in food inflation to 1.3%, while housing group inflation fell to -0.9%. Conversely, China’s inflation increased to 0.5%, with food inflation unchanged at -2.1% and non-food inflation increasing to 0.7% from 0.8% the previous month.

Malaysia's Producer Price Index (PPI), which measures the prices of goods at the factory gate, increased by 1.6% in June 2024 (May: 1.4%). Since March 2024, all sectors have recorded an increase. The Mining sector rose by 4.6% (May: 6.6%), driven by a 4.6% increase in the Extraction of natural gas index. The agriculture, sector climbed to 3.4% (May: 1.3%), with the Growing of perennial crops index contributing 7.5%. Meanwhile, the Manufacturing sector grew by 1.1% (May: 1.0%), largely due to a 9.2% increase in the Manufacture of computer, electronic & optical products index. In the utilities sector, the Water supply index edged up by 7.8%, while the Electricity & gas supply index saw a 1.0% increase.

On a monthly basis, the PPI saw a marginal decline of 0.1% in June 2024 (May: - 0.9%), primarily influenced by a 3.4% drop in the Mining sector (May: -5.5%) and a 1.1% decrease in the Electricity & gas supply index. In contrast, the agriculture sector increased by 1.1% (May: -4.6%). The Manufacturing sector and the Water supply sector both experienced slight gains of 0.1% (May: -0.1%).

OUTLOOK

Malaysia's inflation in July 2024 remained steady at 2% since May, primarily driven by higher costs in the restaurant category, utility bills, and personal care. Despite expectations for higher inflation in July due to diesel subsidy rationalization, the transport index, which includes fuel, vehicle purchases, and public transport services, increased by 1.2%, unchanged from the previous month. The Producer Price Index (PPI) grew by 1.6% in June, up slightly from the previous month.

We believe the impact of the diesel subsidy rationalization is muted, as it applies only to Peninsular Malaysia and diesel makes up just 0.2% of the CPI basket. Also, thanks to the targeted measures such as the diesel fleet card system and cash transfers which are expected to cushion the inflationary effects. The inflation trajectory in 2H2024 will depend on the implementation and extent of RON95 subsidy rationalization. With petrol making up 5.5% of the CPI basket compared to diesel’s 0.2%, RON95 price adjustments are likely to have a more significant impact. Given the increasing likelihood of a delay in RON95 subsidy rationalization until next year, we may revise our current inflation forecast of 2.7% downward. However, we expect inflation to remain within Bank Negara Malaysia's 2.0% to 3.5% range. Nonetheless, with stable inflation and robust domestic growth, Bank Negara Malaysia is expected to maintain the overnight policy rate at 3.00%.

Source: BIMB Securities Research - 23 Aug 2024