Impact from reintroduction of SST on inflation was minimal in September

Malaysia’s headline inflation rose slightly from 0.2% yoy in August to 0.3% in September, significant lower than market expectations. This was higher despite the reintroduction of the sales-and-service tax (SST) in September after the tax holiday periods (three months of zero-rating GST from June to August 2018). However, the underlying core inflation, which excludes volatile and administered price items, rose from -0.2% yoy in August to 0.3% in September.

The slight increase in inflation was attributed to higher cost of food & nonalcoholc beverages, which rose marginally by 0.5% yoy in September (0.4% in August), due to higher cost of food away from home. Likewise, cost of housing & utilities, as well as restaurant & hotel also rose by 2.1% and 1.1% respectively in September (2.0% and 0.7% respectively in August). In contrast, cost of transport improved further by 0.3% yoy in September, particularly due to lower price in fuels & lubricating personal transport equipment. Components which reported negative inflation during the month, include alcoholic beverages & tobacco (-0.9%), clothing & footwear (-3.2%), furnishing & household equipment (-0.8%), health (-0.2%), communication (-0.2%), as well as recreation services & culture (-0.2%). On a mom basis, headline inflation rose from 0.2% yoy in August to 0.5% in September.

Nevertheless, on a cumulative basis, the headline inflation rate rose by 1.2% yoy in January-September 2018, significantly lower than the 3.9% yoy in the corresponding year. We believe the impact of the reintroduction of SST will likely be felt from October 2018 onwards, as businesses may have stockpiled their inventories prior to the implementation of SST and higher prices and cost may only be passed to consumers in the coming months, but we believe the inflationary pressure from SST will be manageable. As such, we are expecting the headline inflation to be likely higher in October, before slowing down in November and December, due to high base effect of retail pump price, which averaged at RM2.30/litre and RM2.27/litre in November and December 2017 respectively (RM2.18/litre in October 2017). We continue to expect inflation rate to be about 1.5% on average this year. The stance of the country’s monetary policy will likely remain accommodative, and BNM will hold its overnight policy rate (OPR) at 3.25% through 2018. The next MPC meeting will be held on 8 November 2018.

Source: Affin Hwang Research - 29 Oct 2018