KUALA LUMPUR (March 25): February’s headline inflation of 1.8% year-on-year (y-o-y) has turned out to be higher than market expectation of 1.4%.

At 1.8% y-o-y, February’s headline inflation is the highest in four months. The higher than expected number for the month was attributed to the bigger increase in non-food prices, which include higher water tariff across most states in the country.

In a note on Monday, MIDF Research described the February inflation number as a “turning point” for Malaysia’s inflation rate as non-food price growth surged to a 10- month high of 1.6% y-o-y.

The Department of Statistics Malaysia (DOSM) reported that Malaysia’s inflation rate in February 2024 was driven by housing, water, electricity, gas and other fuels costs, which expanded by 2.7% y-o-y.

The adjustment in water tariffs is anticipated to have impacted approximately 47% of domestic users at the 20 cubic metre consumption level, with a billing range escalating from RM1.60 to RM8 per month, said RHB Research in a report.

MIDF Research highlighted that the revision of water tariff has caused inflation rates to pick up across peninsular Malaysia, with Penang state recording the highest increase of 2.7% y-o-y.

“Overall price growth in Peninsular Malaysia rose by 1.7% y-o-y, the fastest pace since November 2023. Meanwhile, inflation pressure in Sabah and Sarawak remained stable, increasing by 1.5% y-o-y and 1.9% y-o-y respectively,” it noted.

Economists opined that the various changes in domestic policies, such as the increase in water tariff, the higher service tax of 8% on selected services as well as the introduction of the low-value goods tax (LVGT) would lend to a gradual pick-up in overall prices for the first half 2024 (1H2024) while the possibility of implementation of the fuel subsidy rationalisation programme could also drive inflation rate higher later on this year.

RHB Research said that it anticipates the rollout of the fuel subsidy rationalisation to lift the headline inflation by 0.7% to 1.1% in 2024, in addition to the expected adjustment in service tax.

It also said that the actual magnitude of the increase would hinge on key factors such as the effective date of the implementation, the quantum of the price and tariff adjustments as well as the strength of second-round impact on household spending and business costs.

“At this point, there is no mention of the effective date for fuel subsidy rationalisation or the new retail fuel prices. The rough timeline for fuel subsidy rationalisation is for diesel prices to be rationalised by 2Q2024, followed by RON95 fuel subsidy rationalisation in 2H2024,” said the research house.

RHB has a kept its inflation forecast at 3.3% for 2024.

MIDF Research, which is anticipating the targeted fuel subsidy to be rolled out as early as June 2024 has an inflation forecast of 3.2% for the year.

It said in its report that the government may introduce a managed-float price mechanism for RON95 and provide cash assistance to those eligible as guided by the PADU database in order to cushion the impact.

It is worth noting that both research houses’ forecast inflation rate for the year sits at the higher end of Bank Negara Malaysia’s forecast, which is at 2% to 3.5% for 2024.

Earlier, DOSM also reported that transport inflation has gained 1.2% y-o-y, driven by higher costs of public transport services, which rebounded by 1.7% y-o-y.

Meanwhile, the food and non-alcoholic beverages group, which contributes 29.8% of the total CPI, remained steady at 1.9% y-o-y.