Price of food rose further while cost of transport continued to decline

Malaysia’s headline inflation eased slightly to 1.4% yoy in July from 1.5% in June, partly attributed to the base effect from the removal of the Goods and Services Tax (GST) in June 2018. On a month-on-month basis, inflation rose slightly higher to 0.1% yoy in July compared to 0% in June. The rise in inflation was led by higher prices of food and non-alcoholic beverages, from 2.3% yoy in June to 2.4% in July, its fastest pace since April 2018. Higher inflation was also led by increases in the cost of alcoholic beverages and tobacco (2.3%), furnishing and household equipment (3.3%), health (1.3%), restaurant and hotels (1.7%) as well as miscellaneous goods and services (1.8%). However, lower costs were registered for housing, water, electricity and gas (1.9%) as well as recreation services and culture (2.4%). In contrast, prices of clothing and footwear declined by 1.1% yoy in July from -0.7% in June, while transport costs fell for the ninth consecutive month but at a slower pace of 1.9% yoy in July compared to -2.1% in June. As for core inflation, which excludes administered and volatile price items, it accelerated for the second consecutive month by 2% yoy in July from 1.9% in June, its highest rate since January 2018.

In the first seven months of the year, headline inflation averaged 0.3% compared to 1.5% in the corresponding period last year. Going forward, we expect the low-base effect from the removal of the GST in June until September 2018 to continually put Malaysia’s headline inflation around the 1.5-1.7% level in the coming months. We also anticipate inflation to trend higher once the target fuel subsidy mechanism is implemented sometime this year. However, until implemented, we expect transport costs to remain in the negative territory due to the high base from the previous year when the price of RON95 was capped at RM2.20 per litre from March to December 2018 compared to the current cap of RM2.08 per litre.

Therefore, for the full year 2019, we expect inflation to average around 0.8- 1% (1% in 2018). In its latest monetary policy statement, Bank Negara Malaysia (BNM) also guided that average inflation in 2019 is expected to be broadly stable compared to 2018 as underlying inflation will be supported by continued growth in economic activity and the absence of strong domestic pressures. Hence, we expect BNM to maintain its accommodative monetary policy and leave its overnight policy rate (OPR) unchanged at 3.0% for the rest of the year, which will be in line with its effort to maintain sustainable growth and price stability.

Source: Affin Hwang Research - 15 Aug 2019