Surge in Cost of Transport, Offset the Lower Price of Food in April

Malaysia’s headline inflation rose slightly from 1.3% yoy in March to 1.4% in April, but better than market expectations of 1.6%. The main contribution to inflation was from higher cost of transport, rising from -1.5% yoy in March to 0.4% in April. However, on a month-on-month basis, the cost of transport remained flat, as domestic retail petrol prices in both March and April were relatively unchanged (i.e. RON 95) at about RM2.20 per litre on average. The underlying core inflation, which excludes volatile and administered price items, improved further from 1.7% yoy in March to 1.5% in April.

By component, cost of food & non-alcoholic beverages, which has the largest weightage in CPI basket, improved from 2.8% yoy in March to 2.6% in April, the fifth consecutive months of improvement. This was due to lower price of meat, as well as fish & seafood, which eased by 1.1% yoy and 4.1% respectively in April, which helped to offset the higher price of rice and other items. Similarly, price of furnishing & household equipment also improved from 2.1% yoy in March to 1.8% in April, mainly on lower prices of furniture & furnishing. Other components, which increased in April, include cost of alcoholic beverages & tobacco (0.2%), cost of health (2.1%), cost of recreation services & culture (0.6%) and restaurant & hotels (2.2%).

In the months ahead, we believe cost of transport will likely stay flat, as retail prices for RON97, RON95 and diesel, were be relatively unchanged, rather than fluctuate up and down on a weekly basis. The new Government will also provide further clarity on the country’s tax reform policies within the 100 days, where the Sales and Services Tax (SST) will be reinstated to replace the GST. The GST rate will be reduced from 6% to 0% from 1 June 2018 throughout the country, for goods and services within Malaysia and those imported from abroad. We believe inflation will likely improve from 3.7% in 2017 to average around the 2.5-3.0% level in 2018 (as compared to the official forecast of 2-3%). The 0% GST will likely lower inflationary pressure even though there will be some change in behaviour of household towards consumption spending during this transition. On the interest rate front, the current stance of monetary policy, which is dependent on the state of the external and domestic economy, as well as domestic inflationary pressure, remains accommodative at 3.25%, and likely throughout 2018.

Source: Affin Hwang Research - 24 May 2018