Inflation Lifted by Slower Decline in Transport Costs

Malaysia’s headline inflation rose by 0.2% yoy in March from -0.4% in February, after two consecutive months in negative territory. However, this was slightly lower than market expectations of 0.3%. The turnaround into positive inflation was partly due to the slower decline in transport costs. Core inflation, which excludes administered and volatile price items, rose by 0.5% yoy in March from 0.3% in February, matching its previous high in November 2018.

Cost of transport declined for the fifth straight month by 3% yoy in March, but was lower than -6.8% registered in February. Domestic retail price of RON95 was lower at RM2.08/litre compared to RM2.20/litre in March 2018. However, the pressure on inflation during the month was due to rise in costs of food and non-alcoholic beverages (1.1%) and furnishings and household equipment (0.3%), while alcoholic beverages and tobacco (1.1%), housing, water, electricity and gas and other fuels (2%) and education (1.3%) remained steady. In contrast, prices of clothing and footwear, health, communication, recreation, services and culture and miscellaneous goods and services continued to contract in March. On a month-on-month basis, inflation increased by 0.2% in March similar to its pace in February.

On a quarterly basis, headline inflation averaged -0.3% yoy in 1Q19 compared to 1.8% in 1Q18 (0.3% in 4Q18), its lowest quarterly inflation since 4Q09. Due to the recent cap by the Government on the retail price of RON95 petrol at RM2.08/litre until the middle of this year, the high base from the previous year when the price of RON95 was kept at RM2.20/litre from March to December 2018 will likely continue to exert some downward pressure on transport costs in the coming months. However, once the targeted fuel subsidy is implemented in the second half of 2019, we believe this may put some upward pressure for headline inflation. Higher inflation also hinges on the Government’s decision to remove the price cap of RON95, once the subsidy is implemented. Besides that, the continued increase in core-inflation on an annual basis suggests headline inflation will also trend higher in the coming months. For the full year, we expect inflation to average around 1.5% higher compared to 1.0% in 2018. Going forward, the stance of monetary policy will likely continue to remain accommodative, where we believe Bank Negara Malaysia (BNM) will likely leave its overnight policy rate (OPR) unchanged at 3.25% at the MPC meetings on 7 May 2019, and possibly throughout 2019.

Source: Affin Hwang Research - 25 Apr 2019