Transport Costs Trended Sharply Higher on Rising Retail Pump Prices

Malaysia’s headline inflation rose by 3.7% yoy in August, increasing sharply by 0.5 percentage points from 3.2% in the previous month. This was also the highest level in three months due mainly to rising domestic retail petrol prices. In particular, prices of RON95 was higher in August at RM2.12/litre, as compared to the low of RM1.96/litre in the previous month, an increase of 8.2% mom. This caused the transportation cost to increase significantly from 7.7% yoy in July to 11.7% in August. However, core inflation, which excludes volatile and administered price items, trended lower from 2.6% yoy in July to 2.4% in August.

The improvement in core inflation was due to base effect from higher cost of cultural services in the corresponding period of last year. Cost of cultural services declined sharply from 4.9% in July to 0.3% in August. Among the other price component, prices of food & non-alcoholic beverages rose from 4.2% yoy in July to 4.3% in August, from higher meat prices due partly to the Eid al-Adha festival. Cost of housing, water, electricity, gas & other fuels also rose from 2.2% yoy in July to 2.4% in August, due mainly to higher cost of housing rentals.

Similarly, cost of restaurant & hotels increased sharply by 2.8% yoy in August (2.6% in July), which we believe may be attributed to higher tourist arrivals and spending in conjunction with the SEA Games event during the month. Similarly, the producer price index (PPI), which measures inflation at the producer/manufacturer level and a good leading indicator of future consumer prices, rose by 7.1% yoy in July (6.4% in June), reflecting some inflationary pressure in the months ahead. However, we expect food prices to trend lower, after the festive months in July and August.

On a cumulative basis, Malaysia’s inflation rate averaged 4.0% yoy in January to August 2017, higher than 2.3% in the corresponding period of last year. For 2017 as a whole, we expect the country’s headline CPI to average around 3.5% (2.1% in 2016). We believe BNM will likely maintain its overnight policy rate (OPR) at 3.0% in its remaining MPC meeting for 2017, which will be held on 9 November. However, going into 2018, if domestic economic conditions improve strongly (especially on the exports front), we believe this may lead to a possible 25bps hike in OPR to 3.25%, but is likely to take place only in 2H18.

Source: Affin Hwang Research - 21 Sept 2017