Cost of Transport Improved Sharply Due to High Base Effect

Malaysia’s headline inflation improved further to 1.3% yoy in March (1.4% in February) for third consecutive month. This was the lowest rate since July 2016, and better than market expectations of 1.6%. The improvement in March’s CPI was due mainly to the lower domestic retail petrol prices as compared to the corresponding period of last year. Cost of transport declined sharply by -1.5% yoy in March from -0.3% in February. The underlying core inflation, which excludes volatile and administered price items, also improved from 1.8% yoy in February to 1.7% in March.

By component, cost of food & non-alcoholic beverages, which has the largest weightage in CPI basket, moderated from 3% yoy in February to 2.8% in March, the fourth consecutive months of improvement. Increases in food sub-group index, which comprised of fish & seafood, fruits and milk & eggs, were offset by lower prices of some vegetables during the month. Price of food away from home category also improved from 4.3% in February to 3.9% in March. The decline in cost of transport was due to the fall in domestic retail petrol prices, where price of RON95 fell from the average of RM2.29 per litre in March 2017 to RM2.20 per litre in March 2018. Cost of communication declined by -0.7% yoy in March, while cost of health improved from 2.1% yoy in February to 2% in March. However, prices in restaurants & hotels rose from 1.8% yoy in February to 2% in March, with cost of recreation services & culture also increased from 0.4% to 0.5% during the same period.

On a quarterly basis, Malaysia’s headline inflation averaged 1.8% yoy in 1Q18, as compared to 4.2% in 1Q17, due to high base effect, reflecting high global crude oil prices in 1Q17. In the months ahead, there could be some inflationary pressure, if global oil prices trend higher, which is likely to translate into domestic retail petrol prices (RON95) of around the RM2.20 per litre or higher. The price of RON95 in April 2017 averaged at RM2.09 per litre. For 2018 as a whole, we are maintaining our inflation forecast averaging around the 3.0% level (at the upper end of the official forecast of 2-3%), as compared to 3.7% in 2017 (2.1% in 2016), partly due to a stronger ringgit exchange rate and lower import costs. Going forward, the stance of monetary policy will likely continue to remain accommodative, where Bank Negara Malaysia (BNM) will likely leave its overnight policy rate (OPR) unchanged at 3.25% at the MPC meetings on 10 May 2018.

Source: Affin Hwang Research - 19 Apr 2018