Headline inflation rises to 1.8% yoy in November

Core inflation also accelerated to 2.2% yoy for the month

Malaysia’s headline inflation accelerated from 1.4% yoy in October to 1.8% in November, the highest level since May 2016, and above market expectations of 1.3%. The higher-than-expected inflation was due mainly to rising food & non-alcoholic beverages prices, which increased from 2.5% yoy in October to 3.8% in November. This was also the highest level since July 2016, reflecting partly the subsidy removal for cooking oil (except 1kg polybag and 5kg bottle) starting 1st November. Cost of oils & fats rose sharply by 36.6% yoy in November (0.3% in October). Meanwhile, the magnitude of decline in cost of transport narrowed sharply, from -5.5% yoy in October to -1.5% in November, as reflected in further rise in domestic retail petrol prices (RON95, +0.15sen to RM1.95/litre), (RON97, +0.15sen to RM2.30/litre) and (diesel, +0.25sen to RM2.00/litre) during the month. Petrol (RON95 & 97) and diesel carry a weight of around 8.5% in the CPI basket.

However, the increases in CPI was offset by improvement in the prices of alcoholic beverages & tobacco, which slowed sharply from 19.8% yoy in October to a low of 1.9% in November, due to the base effect, following the around 40% increase in excise tax on cigarettes in November 2015. Inflation in other consumption baskets changed marginally, including health (2.5%), education (1.9%), recreation services & culture (3.2%) and restaurants & hotels (1.9%). Excluding price-administered and volatile price items, core inflation also rose to 2.2% yoy in November (2% in October).

On a cumulative basis, the inflation averaged around 2.1% yoy in the first eleven months of 2016, the same growth recorded in the corresponding period of 2015. Despite higher excise duty for locally-produced hard liquor, which was raised by 150% effective 15th December 2016, as well as rising imported inflation from weaker Ringgit, we believe the full year inflation for 2016 to average 2.2%, as compared to the official forecast of 2.0-2.5%. Going into 2017, with the possibility of further rise in inflationary pressure, potentially as companies adjust their product prices following expiration of Anti-Profiteering Act on 31st December 2016 (if there is no extension), we expect headline inflation to increase further to 2.7% for 2017. We believe BNM will likely keep its Overnight Policy Rate (OPR) unchanged at 3.0% throughout 2017, if economic activities do not deteriorate significantly.

Source: Affin Hwang Research - 22 Dec 2016