Improvement Was Reflected Across the Board, Except Costs of Transport

Malaysia’s headline inflation improved sharply from 1.8% yoy in May to 0.8% in June, the lowest level since March 2015, due partly to the zero-rating of goods and services tax (GST) from June onwards. GST will be subjected to zero-rating from June to August 2018, and will be replaced by the reinstatement of sales and services tax (SST) from September 2018.

In June, the improvement in headline inflation was almost across the board in all major CPI components, except for higher transport cost due to lower base effect in the corresponding period last year. Costs of communication, recreation services and culture, furnishing & household equipment as well as prices of clothing & footwear and alcoholic & beverages posted negative inflation rate during the month. Prices of food & non-alcoholic beverages, which has a share of about 29.5% in CPI basket, improved sharply to 0.8% yoy in June (2.2% in May), attributed from lower prices of food at home (0% yoy vs 1.3% in May). In contrast, cost of transport rose for another month, from 3.8% yoy in May to 5.5% in June. This was in line with the lower price of domestic retail petrol prices, i.e. RON95 of RM1.99/litre in June 2017, as compared to RM2.20/litre in June 2018. The underlying core inflation, which excludes volatile and administered price items, improved sharply to 0.1% yoy in June from 1.5% in May. On a cumulative basis, headline inflation averaged around 1.6% yoy in Jan-June 2018, as compared to 4% in JanJune 2017.

With the zero-rating of GST and higher base effect from last year, we expect the country’s headline inflation to be below 1% for the next two months, before trending slightly higher from September, following the reintroduction of SST. The sales tax will be applicable to selected manufactured and imported products, with rates of 5% and 10% for different products. Similarly, the services tax will be applicable to selected services and not all services, with rate of 6%. We believe that as SST covers a lower range of goods and services as compared to GST, we believe that the inflationary pressure from SST implementation will be manageable. Nevertheless, we are revising our headline inflation forecast to 1.0-1.5% for year 2018, from 2.0-2.5%. From the balance between inflation and economic growth, we believe BNM will continue to focus on economic growth prospects over inflation risk going forward.

Source: Affin Hwang Research - 19 Jul 2018