Inflation Was Dragged by the Sharp Fall in Transport Costs

Malaysia’s headline inflation declined by 0.7% yoy in January from 0.2% in December, as compared to the market expectations of a 0.4% decline. The country’s inflation rate dipped into negative territory for the first time since November 2009. On a month-on-month basis, inflation declined by -0.5% in January (+0.1% in December). Meanwhile, core inflation, which excludes administered and volatile price items, slowed for the second straight month to 0.2% yoy from 0.4% in December. The decline in headline inflation was mainly attributed to the sharp fall in the cost of transport, which makes up 14.6% of the total weight in the CPI basket, where it fell by -7.8% yoy in January from -2% in December. This was due to the lower average prices of domestic retail petrol (RON95) in January 2019 of RM1.98/litre, compared to RM2.28/litre in January 2018. Apart from transport costs, inflation was also weighed down by decline in costs of clothing and footwear (-3.3%), furnishings and household equipment (-0.3%), health (-0.5%), communication (-1.2%), recreation, services and culture (-0.4%) and miscellaneous goods and services (-2.4%). However, prices of food and non-alcoholic beverages rose by 1% yoy in January, from 0.7% in December. Meanwhile, costs of alcoholic beverages and tobacco as well as housing, water, electricity, gas and other fuels were steady at 1.1% and 2%, respectively for the second consecutive month in January, see Fig 1.

In the months ahead, as the lower base effects of transport costs slowly moderate, with prices of RON95 trending higher recently, we believe headline inflation rate is expected to revert back to positive territory from March 2019 onwards. The weekly float for RON95 for the week of 16-22 February 2019 was at RM1.98/litre, lower than RM2.26/litre in February 2018. However, food prices will likely trend slightly higher in February due to the Lunar New Year festive season in the same month. Going into 2019, with healthy economic growth and steady domestic demand, we believe the risk of deflation will diminish going forward, as we expect the full-year inflation to average around 1.5-2%, with real GDP growth at 4.7% projected for 2019. We believe Bank Negara Malaysia (BNM) will likely maintain its accommodative monetary policy stance and keep its overnight policy rate (OPR) unchanged at 3.25% throughout 2019, where this is consistent with ensuring sustained economic growth and inflation stability. However, the latest BNM MPC statement reflected some concerns over potential escalation of trade tensions and commodity-related shocks, where it noted risks to global economic growth are tilted to the downside.

Source: Affin Hwang Research - 25 Feb 2019