• Inflation contracted in January due to declines in costs of transport, housing & utilities, hotels & restaurants, and clothing & footwear
• Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy for the third month in a row in January
• Headline inflation is likely to average around 2% in 2021, but this will also hinge on global oil and commodity price developments.

Transport costs declined at a smaller magnitude of 5.1% yoy in January

Malaysia’s headline inflation fell by 0.2% yoy in January from -1.4% in December, remaining in negative territory for the eleventh consecutive month since March 2020. The continued contraction in inflation was attributed mainly to declines in costs of transport, housing & utilities, restaurants and hotels as well as prices of clothing and footwear in January. Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy for the third month in a row. Headline inflation, excluding fuel for vehicles (RON95, RON97 and diesel), rose by 0.5% yoy in January from -0.1% in December. Costs of transport contracted at a slower pace of 5.1% yoy in January (-8.4% in December), in tandem with a lower domestic retail petrol price of RON95, which averaged RM1.87/litre in January as compared to RM2.08/litre in January 2020. Headline inflation was also dragged down by costs of housing and utilities (-0.7%), clothing and footwear (-0.4%) and restaurants and hotels (-0.1%). Meanwhile, prices of food and non-alcoholic beverages (+1.5%), alcoholic beverages and tobacco (+0.7%) and furnishing and household equipment (+0.2%) rose during the month. Costs of miscellaneous goods and services (+1.8%), health (+0.7%), education (+0.2%), recreation services and culture (+0.1%) eased in January, while costs of communication remained stable during the month.

Going into 2021, we expect higher global oil prices, improvement in economic activity and the low base effect since March 2020 to gradually lead to upward inflationary pressure. Despite recent revision to the ceiling prices of RON 95 and diesel to RM2.05 per litre and RM2.15 per litre from RM2.08 per litre and RM2.18 per litre, respectively, we believe domestic retail petrol prices may trend higher in 2H21, due to possibly higher global oil prices. We are projecting the country’s headline inflation to average around 2% in 2021 (-1.2% in 2020), as compared to the official forecast of between 1% and 3%, but this will also hinge on global oil and commodity price developments. In terms of monetary policy, we continue to expect BNM to adopt a wait-and-see approach especially with the ongoing fiscal stimulus support, expected global recovery and roll out of vaccine through the National Covid-19 Immunisation Programme starting at the end of February 2021. Although the MCO was extended in Selangor, KL, Johor and Penang until March 4, the gradual easing of restrictions with more non-essential businesses allowed to operate will be supportive of an economic recovery. We believe BNM will likely leave its OPR unchanged at 1.75% at the next MPC meeting and possibly throughout 2021.

Source: Affin Hwang Research - 25 Feb 2021