Headline Inflation Rises to 1.8% Yoy in May

Higher Cost of Transport Due to Lower Base Effect Last Year

Malaysia’s headline inflation rose from 1.4% yoy in April to 1.8% in May, the highest level in four-months but in line with market expectations. This was partly due to higher cost of transport, which increased sharply from 0.4% yoy in April to 3.8% in May, reflecting the lower base effect in the corresponding period last year. The domestic retail petrol prices (i.e. RON 95) was unchanged at RM2.20 per litre in May, (RM2.10 per litre in May 2017). On a month-on-month basis, cost of transport only rose marginally by 0.1% in May. The underlying core inflation, which excludes volatile and administered price items, remained unchanged at 1.5% yoy in May.

The cost of food & non-alcoholic beverages, the largest weightage in CPI basket, with a weight of 29.5%, improved for another month, from 2.6% yoy in April to 2.2% in May. The improvement in food prices were reflected almost across the board, such as food at home (1.3% yoy in May vs. 1.9% in April), as well as prices of meat and fish & seafood. However, we expect prices of food and non-alcoholic beverages to increase slightly in June due to the month of Ramadan and Eid al-Fitr festival. Among the other major CPI components, improvement was seen in cost of restaurant and hotels, as well as declines in cost of clothing & footwear and communication. Prices of furnishings and household equipment and health also experienced improvement in May. In contrast, housing & utilities increased slightly to 2.1% yoy in May, while cost of education to 1.2% (1.1% in April). On a cumulative basis, headline inflation averaged around 1.7% yoy in Jan-May 2018 (4.1% in Jan-May 2017).

In the months ahead, we believe cost of transport will remain at current high level due to lower base effect in the corresponding periods of last year. However, with the GST rate being reduced from 6% to 0%, effective from 1 June 2018, to be replaced by sales and services tax (SST) in September 2018, as well as the decline in producer price index (-0.8% yoy in April), we believe inflationary pressure will remain manageable. We believe the country’s headline inflation will likely improve from 3.7% in 2017 to average around 2.5-3.0% in 2018 (as compared to the official forecast of 2-3%). The stance of monetary policy will likely continue to remain accommodative, where BNM will likely leave its overnight policy rate (OPR) unchanged at 3.25% at the MPC meeting on 11 July 2018.

Source: Affin Hwang Research - 21 Jun 2018