Transportation Cost Improved Further and Declined by 3.2% Mom

Malaysia’s headline inflation improved further to 3.9% in May, after slowing down to 4.4% in April (from a high of 5.1% in March 2017). This was slightly better than market expectations of 4.1%. Further improvement in the country’s headline inflation was attributed largely to the decline in the domestic retail pump price, especially for RON95 petrol, which was reduced further in May. Cost of transport improved from 16.7% yoy in April to 13.1% in May. However, core inflation, which excludes volatile and administered prices of goods and services, rose slightly to 2.6% in May after being stable at 2.5% for three consecutive months.

Prices of food and non-alcoholic beverages rose to 4.4% yoy in May (4.1% in April), due to the month of Ramadan and incoming Eid al-Fitr festival. In particular, prices of fresh fish, fresh seafood and fresh meat rose yoy by 8.7%, 7.3% and 5.3%, respectively, during the month. Prices of furnishings and household equipment and health also experienced a slight increase in May. Nonetheless, apart from transport costs, among the other major CPI components, improvement can also be seen in costs of restaurant and hotels, recreation services and culture and miscellaneous goods and services.

Moving forward, we believe a further reduction in domestic retail pump prices will continue to push down Malaysia’s headline inflation. Saudi Arabia decided to cut the pricing for June oil exports to Asia as it fights to defend its share in its biggest regional market, where following the announcement, the price of MOPS 95 experienced a steep decline by approximately 8.8%, despite a relatively flat movement in the global crude oil price. Domestic retail pump prices, which are based on MOPS 95, were generally lower in May and are likely to trend lower in June. For the first three weeks of June, the price for RON 95 was already on average RM0.05 lower than in May. In May, the price of RON 95 had declined by an average RM0.11 to RM2.09 per litre (RM1.98 per litre currently).

However, further improvement in cost of transport will likely be offset by higher food prices, where we are expecting the coming Hari Raya celebration to put some pressure on the overall prices. We are maintaining our forecast for the overall inflation at 3.5% for 2017 (2.1% in 2016). Despite some inflationary pressure, we believe the BNM will likely maintain its policy rate at 3.0% throughout 2017.

Source: Affin Hwang Research - 22 Jun 2017