Food Prices Slowed From 4.6% Yoy in September to 4.4% in October

Malaysia’s headline inflation improved to 3.7% yoy in October, after rising by 4.3% in September (3.7% in August). This was lower than market expectations of 4.1% during the month. The improvement in inflation was reflected almost across the board, led by lower prices of food and non-alcoholic beverages and costs of transport. On a cumulative basis, the headline inflation rate rose by 4% yoy in the first ten month of 2017, higher than 2.2% in the corresponding period of last year.

Transport costs eased by 12.1% yoy in October, as compared to 15.8% in September. This was in line with the lower domestic retail petrol price during the month, where domestic retail petrol prices (RON 95) fell to an average of RM2.18 per litre in October, from RM2.19 per litre in September, while RON 97 sustained at an average of RM2.48 per litre in both months. Meanwhile, other components, including cost of recreation, services & culture, education, housing and utilities, as well as alcoholic beverages & tobacco remained unchanged in the month of October. Nonetheless, cost of restaurants & hotels increased slightly by 2.7% yoy in October (2.6% yoy in September). Core inflation, which excludes volatile and administered price items, also eased at 2.3% yoy in October (2.4% in September). Food prices slowed from 4.6% yoy in September to 4.4% in October, partly attributed to lower prices of oil and fats (16.2% vs 39.6% yoy in September), as well as fish and seafood (6.8% vs 8.0% yoy in September), which offset the higher price of meat in the same month. However, we believe the drop in prices of cooking oil by 19.7% mom in October, may be partly due to some adjustment in the weightage of the item in the CPI baskets, with slightly higher weightage to the 1kg packet, which are still being subsidised, rather than the 5kg and 10kg bottles.

We expect the country’s full-year inflation rate to trend between 3.9%-4.1% in 2017. For 2018, while we expect inflation to improve to about 2.5% in 2018, there are some upside risks depending on the direction of global oil prices and the impact on domestic retail petrol prices. Similarly, in the months ahead, we expect cost of transport to put some upward pressure on inflation, in tandem with the recent increase in global crude oil price, which already trended higher above US$60 per barrel since end-month October this year. On the monetary policy front, we believe BNM may likely increase its OPR by 25 bps to 3.25% in mid-2018, on expectations that the current strong economic momentum continues on a favourable global economic environment.

Source: Affin Hwang Research - 27 Nov 2017