Low Base Effect From Removal of GST Partly Buoyed Inflation

Malaysia’s headline inflation rose slightly to 1.5% yoy in August from 1.4% in July, led by higher prices of food and non-alcoholic beverages, which rose for a fourth consecutive month from 2.4% yoy in July to 2.6% in August, its fastest pace since April 2018. Slightly higher inflation was also partly due to the ongoing low-base effect after removal of the Goods and Services Tax (GST) from June to September 2018. Besides that, higher cost of alcoholic beverages and tobacco (+2.5% yoy), health (1.4%), communication (2.2%) and miscellaneous goods and services (2.5%) also contributed to higher inflation. Meanwhile, cost of housing, water, electricity and gas eased in August to 1.8% yoy, from 1.9% in July. Prices of clothing and footwear fell by 1.1% yoy in August (-1.1% in July), while transport costs remained in contraction for a tenth consecutive month from -1.9% yoy in July to -2.1% in August. As for core inflation, which excludes administered and volatile price items, it was unchanged at its fastest rate since January 2018 at 2% yoy in August (2% in July). On a month-on-month basis, inflation rose by 0.2% in August compared to 0.1% in July.

In the first eight months of the year, headline inflation averaged 0.5% compared to 1.3% in the same period last year. Going forward, we believe the country’s headline inflation is likely to hover around the 1.5-1.7% level in the coming months, due to the low-base effect from the removal of the GST in June until September 2018. As the targeted fuel subsidy scheme has yet to be implemented and due to the high-base effect from the previous year, when the price of RON95 was capped at RM2.20/litre from March to December 2018, we believe this will keep transport costs down. We expect inflation to average c.0.8-1.0% in 2019 (1.0% in 2018). The producer price index (PPI), which measures inflation at the producer/ manufacturer level and a good leading indicator of future consumer prices, fell 2.2% yoy in July (-1.8% in June), signalling that cost-push inflation will likely also remain low in the months ahead. We believe the recent spike in global oil prices and its impact on Malaysia’s inflation, after the attacks on Saudi Arabia’s Abqaiq and Khurais oil facilities, will be manageable, as the retail fuel price of RON95 remained capped at RM2.08/litre. Furthermore, oil production at the Saudi Arabia facilities may resume by end of September (even though not a full recovery). We expect the BNM to maintain its accommodative monetary policy and leave its overnight policy rate (OPR) unchanged at 3.0% for the rest of 2019, but its policy focus remains on economic growth amid challenging external conditions.

Source: Affin Hwang Research - 25 Sept 2019