However, Core Inflation Rose for the Third Consecutive Month

Malaysia’s headline inflation improved from 0.6% yoy in October to 0.2% in November, better than market expectations of 0.4%. The sharp improvement in headline inflation was due partly to the high base in the corresponding period of last year. This was attributed to the lower cost of transportation, which declined from 0.8% yoy in October to -2.3% in November. The fixed retail RON95 pump price was at RM2.20/litre in November as compared with RM2.30/litre in November last year.

Price of food and non-alcoholic beverages rose slightly by 1.1% yoy in November as compared to 1.2% in October. However, the price of alcoholic beverages and tobacco rose from -0.8% yoy in October to 1% in November, mainly due to the increase in the price of tobacco (up 2.4% yoy in November), where based on Rule 8A (2B) under the Control of Tobacco Product Regulations 2004, the implementation of the sales-and-services tax (SST) effective from November 2018 led to higher prices of all tobacco products including cigarettes. Price of restaurants and hotels remained stable at 1.2% yoy in November, while the price of education climbed from 1.1% yoy to 1.4% in November.

Meanwhile, components that continue to register drops in prices include clothing and footwear (-3.1%), furnishing and household equipment (-0.1%), health (-0.2%), communication (-1.3%), recreation and culture (-0.3%), and miscellaneous goods and services (-2.6%). Underlying core inflation, which excludes administered and volatile price items, rose from 0.4% yoy in October to 0.5% in November. The higher underlying inflation was mainly due to higher prices for food and non-alcoholic beverages.

In the months ahead, we are expecting headline inflation to increase slightly in December 2018, mainly due to the lower base price of RON95 in December 2017 at RM2.27/litre. We expect full-year inflation to average c.1.2-1.3% in 2018 (3.7% in 2017). Despite the planned reintroduction of the targeted fuel subsidy in 2H19, the impact would likely to be manageable due to the current level of global oil prices. We expect headline inflation to be in a range of 2.0-2.2% in 2019E. As risks to the global growth outlook remain tilted to the downside, we expect BNM to leave the overnight policy rate (OPR) at 3.25% throughout 2019.

Source: Affin Hwang Research - 20 Dec 2018