Lower Inflation Was Reflected Almost Across the Board

Malaysia’s headline inflation improved from 0.9% yoy in July to 0.2% in August, lower than market expectations of 0.4%. The headline inflation continued to improve due to the tax holiday period, as a result of the zerorating of goods and services tax (GST), which was effective from June 2018 till August 2018, before the reintroduction of sales and service tax (SST) in September. However, the underlying core inflation, which excludes volatile and administered price items, rose by 0.2% yoy in August (-0.2% in July).

The lower-than-expected inflation was reflected almost across the board. Food & non-alcoholic beverages,which has the highest share in CPI basket improved by 0.4% yoy in August (0.7% in July), due mainly from the decline in food price at home. This was led by the price of meat, which dropped by 3.1%. Cost of transport also improved by 2.1% yoy in August, after four straight months of increases. This was attributed partly to the lower base effect of retail pump price in August last year, where the price of RON95 averaged at RM2.12 /litre, against RM2.20/litre in August this year.

Other components, which dragged the inflation lower during the month include alcoholic beverages & tobacco (-1%), communications (-4%) as well as restaurant & hotel (0.7%). Nonetheless, cost of health remained flat, while cost of education increased slightly by 1.1% yoy in August.

On a cumulative basis, the headline inflation rate rose by 1.3% yoy in January-August 2018, significantly lower than 3.9% yoy in the corresponding year. Beginning September 2018, as the country’s previous GST system was replaced by sales & services tax (SST), and after the zero GST tax holiday, we believe September’s inflation will likely trend slightly higher, but will be moderate, as some goods prices remained unchanged, which were stocked up a month by business owners. However, we believe the impact of new SST will likely be from October onwards, and we may see some price of goods to increase due to sales tax as well as 6% services tax. Nevertheless, we believe the inflationary pressure from the reintroduction of SST will be manageable, and we expect inflation to be about 1.5% average this year. The stance of the country’s monetary policy will remain accommodative. We are maintaining our view that BNM will likely keep its overnight policy rate (OPR) at 3.25% throughout 2018.

Source: Affin Hwang Research - 20 Sept 2018