Inflation Weighed Down by Negative Transport Costs

Malaysia’s headline inflation fell into negative territory at -0.4% yoy for the second consecutive month in February, albeit smaller decline compared to -0.7% in January, due mainly to continued sharp decline in transport costs. Core inflation, which excludes administered and volatile price items, rose by 0.3% yoy in February (from 0.2% in January). Cost of transport declined by 6.8% yoy in February, vs. sharp decline of 7.8% in January, as average price of RON95 remained low at RM1.99/litre compared to RM2.26/litre in February 2018. Cost of transport contributed 14.6% to the total weight in the CPI basket. Other components which registered declines in February were clothing and footwear (-3.2%), health (-0.4%), communication (-1.2%), recreation, services and culture (-0.4%) and miscellaneous goods and services (-2.2%). In contrast, costs of furnishing and household equipment, education and restaurant and hotels increased during the month. Meanwhile, prices of food and non-alcoholic beverages, which contributes 29.5% to the total weight in the CPI basket, rose by 1% yoy in February, similar to January, possibly due to the Lunar New Year festive season during the month, see Fig 1. On a month-on-month basis, inflation rose by 0.2% in February compared to a decline of 0.5% in January.

We believe that the risk of deflation is likely to be temporary, as reflected by the deflation experienced previously in 2009, where it lasted for six months (from June to November 2009), due to the high base of transport costs in 2008. For the week of 16-22 March 2019, the domestic retail petrol prices (RON95) rose to RM2.08 per litre compared to RM2.20 per litre seen in March 2018. With relatively higher RON95 petrol and the increase in coreinflation rate, on a yearly and monthly basis, we believe this may translate into some pickup in headline inflation in the near term. We continue to expect headline inflation to turn positive from March 2019 onwards once the base effects ease. However, following the Government’s announcement at endFebruary to cap retail price of RON95 petrol at RM2.08/litre to alleviate the cost of living, we believe this would keep inflation steady going forward. For the full year, we expect inflation to average higher around 1.5% compared to 1.0% in 2018, due possibly to the implementation of the targeted fuel subsidy, which may be announced sometime in 2H19. We continue to expect BNM to maintain its accommodative monetary policy, where the OPR will likely be kept unchanged at 3.25% for the rest of the year, to ensure sustained domestic growth and stable inflation.

Source: Affin Hwang Research - 25 Mar 2019