Higher Inflation Due to the Low-base Effect With the Removal of GST

Malaysia’s headline inflation rose to 1.5% yoy in June after remaining stable at 0.2% in the previous three months. This was mainly due to the low-base effect after the abolishment of Good and Services Tax (GST) in June 2018. The sharp increase in inflation was reflected mainly in higher prices of food and non-alcoholic beverages (which have a combined 29.5% weight in the CPI), which rose from 1.2% yoy in May to 2.3% in June, the highest yoy increase since April 2018. Apart from that, higher inflation was also driven by increases in the cost of alcoholic beverages and tobacco, housing, water, electricity, gas and other fuels, furnishing and household equipment, health, communication, recreation services and culture, education, restaurants and hotels. Similarly, core inflation, which excludes administered and volatile price items, rose sharply by 1.9% yoy in June from 0.4% in May, due to the low-base effect. Nevertheless, cost of transport continued to decline for the eighth month in a row, but at a slower pace, contracting by 2.1% yoy in June as compared to -2.5% in May. Prices of clothing and footwear also contracted in June but at a smaller decline of 0.7% yoy (-3.2% in May). In 1H19, the headline inflation rose by 0.2% yoy, lower than 1.6% in the corresponding period of last year.

We believe the country’s headline inflation, which already trended higher in June, will likely increase slightly further due to the low-base effect in the months ahead. However, with cost-push inflation from lower commodity prices remaining low, we believe the country’s inflation will remain manageable. According to Ministry of Domestic Trade and Consumer Affair (KPDNHEP), the proposed targeted fuel subsidy scheme will likely be rolled out by this year, instead of end-July 2019.

We believe the cost of transport will remain subdued as the domestic fuel price of RON95 will likely be capped at RM2.08 per litre, as compared to the previous ceiling price at RM2.20 per litre in the last year. We believe cost of transport will only return to positive territory after the introduction of targeted fuel subsidy, where domestic retail fuel prices will fluctuate depending on global oil prices. With the delay in introducing the targeted fuel subsidy scheme and the decline in transportation index in the near term, we believe the country’s inflation will average around 0.8-1.0% for 2019, a downward revision from our earlier projection of 1.2-1.3% (1.0% in 2018). We believe BNM will likely leave its overnight policy rate (OPR) unchanged at 3.0% throughout the year, after the last 25bp cut in May.

Source: Affin Hwang Research - 25 Jul 2019