Headline Inflation Weighed Down Mainly by Transport Costs

Malaysia’s headline inflation contracted by 2.9% yoy in May, the same decline as in the previous month. Headline inflation has contracted for three consecutive months due mainly to the sharp decline in the cost of transport. During May, the cost of transport fell sharply by 20.8% yoy (-21.5% in April) as reflected in the domestic retail petrol price (RON95) of RM1.30/litre as compared to RM2.08/litre in May 2019. However, excluding fuel for vehicles (ie, domestic retail petrol prices), headline inflation registered a positive growth of 0.1% in May (0.2% in April), due to stable food prices. Core inflation, which excludes administered and volatile price items, slowed to 1.1% yoy in May (1.3% in April), the lowest level since May 2019. The cost of housing and utilities declined for the second month in a row by 2.6% yoy in May (-2.2% in April), possibly due to the electricity discounts by the government as part of the stimulus measure for households. Inflation was also dragged down by the fall in the cost of clothing and footwear (-1.1%) as well as furnishing (-0.2%). Meanwhile, prices of food and nonalcoholic beverages (+1.2%), healthcare (+1.2%), alcoholic beverages and tobacco (+0.2%) and communications (+1.6%) remained stable in May. In contrast, prices of restaurants and hotels (+0.9%), recreation services and culture (+0.7%) and miscellaneous goods and services (+2.8%) rose during the month.

On a cumulative basis, the headline inflation rate averaged -0.6% yoy in the first five months of 2020, compared to -0.1% in the same period last year. In the months ahead, as the global Brent crude oil price has recovered from its low of US$19.33/barrel on 21 April 2020 to about US$42/barrel currently, we believe the cost of transport will likely decline at a smaller magnitude. Domestic retail fuel prices of RON95 and RON97 have increased from RM1.43/litre and RM1.73/litre respectively, at the start of May, to RM1.59/litre and RM1.89/litre respectively at present. The domestic retail fuel price of RON95 had been capped at RM2.08/litre in the corresponding period last year. As a result, last year’s higher base for RON95 will continue to weigh on headline inflation in the coming months, but gradual inflationary pressure will continue from food prices. In view of short-term deflation risk, we are projecting headline inflation to average 0.1% for 2020 (0.7% in 2019). We believe BNM will keep its overnight policy rate at 2% at the next MPC meeting on 7 July, and possibly in the remaining two meetings on 10 Sept and 3 Nov this year. The country’s domestic demand is gradually showing signs of recovery from the re-opening of almost all essential and non-essential services since 4 May 2020, supported by stimulus measures from monetary and fiscal policy fronts, which have reduced some downside risk to the economy.

Source: Affin Hwang Research - 25 Jun 2020