• Inflation contracted in October for the eighth consecutive month led by the decline in costs of transport, housing & utilities and clothing and footwear
• Core inflation, which excludes administered and volatile price items, eased to 0.8% yoy in October, its lowest level since May 2019 (1% in September)
• We expect headline inflation to decline by 1.0% in 2020 before trending higher to around 2% in 2021.

Costs of Transport Contracted Further by 10.2% in October

Malaysia’s headline inflation contracted further by 1.5% yoy in October from -1.4% in September. The country’s inflation has been in negative territory and in a state of deflation for the eighth consecutive month since March 2020. The larger contraction in inflation was attributed mainly to declines in costs of transport and housing & utilities, which both contribute around 38.4% of the total CPI basket. Costs of transport contracted further by 10.2% yoy in October from -9.9% in September, making this its eighth consecutive month of decline. This was in tandem with the lower domestic retail petrol price of RON95, which averaged RM1.67/litre in October as compared to RM2.08/litre in October 2019. Headline inflation, excluding fuel for vehicles (RON95, RON97 and diesel), was unchanged at +0.1% yoy for the second month in a row in October. Meanwhile, core inflation, which excludes administered and volatile price items, eased to 0.8% yoy from 1.0% yoy in September, its lowest level since May 2019. Headline inflation was also dragged down by costs of housing and utilities, which contracted by 3.0% yoy in October, partly due to ongoing electricity discounts. Costs of clothing and footwear fell by 0.4% yoy in October (-0.6% in September). Prices of food and non-alcoholic beverages rose by 1.5% in October, up slightly from 1.4% yoy in September. Prices of miscellaneous goods and services, recreation, services and culture rose during the month. However, costs of health, education, alcoholic beverages and tobacco, furnishing and household equipment as well as restaurants and hotels remained stable in October.

In the first ten months of 2020, the country’s headline inflation rate contracted by an average of 1.1% yoy compared to +0.6% in the corresponding period last year. For the full year, we are projecting headline inflation to average around -1.0% in 2020 (0.7% in 2019). This will be partly due to the high base of transport cost in the previous year, when the retail fuel price of RON95 was capped at RM2.08/litre throughout 4Q19 compared to RM1.64/litre currently. In addition, the electricity discount, which will be extended until December 2020, will also add to the downward pressure on inflation. Going into 2021, we expect headline inflation to trend higher due partly to the low base effect since March 2020, as well as expectations of higher global oil prices and improvement in economic activity. For 2021, we are projecting the headline inflation to average around 2%, as compared to the official forecast of between 1% and 3%. After lowering the OPR by a total of 125bps from January to July, we believe BNM will likely maintain it at 1.75% throughout 2021, which we see as appropriate and providing stimulus to the economy.

Source: Affin Hwang Research - 26 Nov 2020