Impact of higher oil price on domestic retail prices will begin to diminish

Malaysia’s headline inflation rose by 3.5% yoy in December, a slight uptick from 3.4% in November, attributed to higher food prices and transport costs during the month. Prices of food & non-alcoholic beverages rose from 4.0% yoy in November to 4.1% in December, with notable increases in some vegetables and seafood prices. The cost of transport increased from 10.8% yoy in November to 11.5% in December, on the lower base.

Retail pump prices trended lower in December, with RON95 averaging RM2.27/litre vs. RM2.30/ litre in November. The cost of education rose from 1.5% yoy in November to 1.7% in December, due to the higher cost of tertiary education, while the cost of health also increased from 2.2% to 2.3% during the same period. The cost of furnishing, household equipment & routine household maintenance improved to 2.4% yoy in December (2.5% in November). The underlying core inflation, which exclude volatile and administered price items, was stable at 2.2% in December 2017. For the full year of 2017, Malaysia’s headline inflation rose sharply from 2.1% in 2016 to 3.7%, partly reflecting the higher cost of transport.

Going into 2018, with the impact of the lower base effect of domestic retail pump prices beginning to diminish, we believe this will eventually lead to lower inflation numbers, especially for the cost of transport, resulting in a better headline inflation of around 3.0% in 2018 (3.7% in 2017). This could also result from a stronger Ringgit against the US$ on imported inflation (which would limit the rise in domestic retail petrol prices). The Ringgit has appreciated by close to 3.5% since early 2018. The producer price index (PPI) improved from 4.7% yoy in October to 4.3% in November, on the back of softer global commodity prices, while food prices, which are typically volatile due to seasonal supply and demand conditions, could trend higher ahead of the festive season in 1Q18.

Source: Affin Hwang Research - 25 Jan 2018