Food Prices Rose to Their Highest Yoy Level in 18 Months

Malaysia’s headline inflation rose sharply to 4.3% yoy in September, above the 3.7% in August, but was in line with market expectations. This was due mainly to the higher domestic retail petrol price in September, where the commonly used domestic RON95 rose by an average of RM2.19/litre in September 2017, vs. RM1.70/litre in September 2016. Fuels & lubricants for personal transport equipment accounted for 7.8% of the CPI weights. As a result, cost of transport rose sharply to 15.8% yoy in September (11.7% in August).

In September, food prices also increased by 4.8% yoy (4.5% in August), the highest yoy increase in 18 months, attributed to higher prices of fresh seafood (8.7% yoy), fresh fish (8.4%) and fresh vegetables (5.6%). The higher price of these food items may be due to the monsoon season in the month of AugustSeptember. As the rainy season continued until the middle of October, we believe food prices will remain high in 4Q17, and likely begin to stabilise only by the end of this year.

Cost of cultural services, which rose sharply in July, trended lower to 0.4% in September. Cost of housing and utilities (such as water, electricity, gas and other fuels) stayed unchanged, as well as stable cost of education in September. Core inflation, which excludes volatile and administered price items, remained unchanged at 2.4% in September. On a cumulative basis, the headline inflation rate rose by 4% yoy in January-September 2017, higher than 2.2% in the corresponding period of last year.

On a quarterly basis, despite higher food prices, the country’s inflation rate slowed from 4.3% yoy in 1Q17 to 4% in 2Q17 and 3.8% in 3Q17. Moving into 4Q17, we believe that the inflation number will improve further, due partly to the normalisation of the oil price towards the end of last year, as global oil price will likely remain relatively stable, leading to a less volatile inflation numbers for the year. However, in view of the higher inflation rate in 1H17, we are revising upward our inflation forecast to 3.9% for 2017 (from an earlier projection of 3.5%), but expect the inflation rate to be between 2.2-2.5% for 2018. On the monetary policy front, we believe BNM will likely leave its overnight policy rate (OPR) unchanged at 3.0% in the coming MPC meeting on 9 November 2017. We believe any increase or normalisation of OPR will likely take place only in 2H18, with a possible rate hike of 25 bps to 3.25% by end 2018.

Source: Affin Hwang Research - 23 Oct 2017