Inflation declined sharply by 2.9% yoy in April due to low transport costs

Malaysia’s headline inflation declined sharply by 2.9% yoy in April from -0.2% in March, due mainly to the drop in the cost of transport as well as housing, electricity, gas and other fuels. This was the sharpest contraction in headline inflation since 2010, possibly indicating a risk of deflation. However, when fuel for vehicles (ie, domestic retail petrol prices) is taken out, CPI registered positive growth of 0.2% in April compared to 1.3% in March. Core inflation, which excludes administered and volatile price items, also remained steady at 1.3% yoy for the third consecutive month in April. Cost of transport, which accounts for 14.6% of the total CPI basket, declined sharply for a second straight month by 21.5% yoy (-8.9% in March) due to the sharp drop in domestic retail petrol price of RON95 to RM1.27/litre in April (compared to RM2.08/litre in April 2019). Similarly, cost of housing and utilities fell by 2.2% yoy from up 1.6% in March, which may be due to the electricity discounts provided by the government, which began on 1 April 2020. Inflation was also weighed down by the decline in cost of clothing and footwear (-1.2%) as well as lower increases for the cost of furnishing (+0.3%), restaurants & hotels (+0.7%), recreation and culture (+0.6%), education (+1.2%), health (+1.2%) and miscellaneous goods and services (+2.3%). However, price of food and non-alcoholic beverages remained steady, up 1.2% yoy for April. In contrast, the cost of communication inched up from 1.5% yoy in March to 1.6% in April.

In the months ahead, the sharp drop in global oil prices will likely continue to weigh on cost of transport, signalling negative yoy growth in headline inflation. Although domestic retail fuel prices of RON95 and RON97 have risen from RM1.25/litre and RM1.55/litre, respectively, at the start of April to RM1.31/litre and RM1.61/litre, respectively, until 22 May, domestic retail petrol prices are still sharply lower compared to the corresponding period of last year. Besides that, the country’s inflationary pressure will likely be weighed down by the ongoing electricity discount until September 2020. The drop in producer price index (PPI) from an expansion of 0.9% in February to -1.9% yoy in March also suggests that cost-push inflation will remain weak in the coming months. In view of near-term deflation risk, we are projecting headline inflation to average 0.1% for 2020E (0.7% in 2019). On the monetary policy front, after the 50bps cut in overnight policy rate (OPR) by Bank Negara Malaysia (BNM) at the last MPC meeting, from 2.5% to 2% (cumulative cut of 100bps since early 2020), we expect BNM to maintain its OPR at the current level for now. However, we do not discount the possibility of another rate cut in 4Q20, if economic activity continues to soften sharply in 2H20, especially from the external environment.

Source: Affin Hwang Research - 22 May 2020