• Inflation increased for the first time in a year in February due to the slower decline in the cost of transport
• Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy for the fourth month in a row
• Headline inflation is projected to average higher at 2% in 2021, but this will also hinge on global oil and commodity price developments.

Headline Inflation Averaged -0.1% Yoy in the First Two Months of 2021

Malaysia’s headline inflation increased to 0.1% yoy in February from -0.2% in January, its first positive inflation rate since February 2020. Inflation turned positive due to a smaller decline in the cost of transport during the month. Core inflation, which excludes administered and volatile price items, remained unchanged at 0.7% yoy for the fourth month in a row. Headline inflation, excluding fuel for vehicles (RON95, RON97 and diesel), eased slightly to 0.4% yoy in February from 0.5% yoy in January. The cost of transport contracted at a slower pace of 2% yoy in February compared to -5.1% in January, in tandem with the lower domestic retail petrol price of RON95, which averaged at RM1.95/litre in February as compared to RM2.07/litre in February 2020. Headline inflation was also supported by the positive rise in the cost of furnishing and household equipment (+0.3%) whereas costs of health (+0.7%), alcoholic beverages and tobacco (+0.7%), recreation services and culture (+0.1%) and communication remained stable during the month. Meanwhile, costs of miscellaneous goods and services (+1.6%), food and non-alcoholic beverages (+1.4%) and education (+0.1%) moderated in February. In contrast, prices of housing and utilities (-0.8%), clothing and footwear (-0.4%) and restaurants and hotels (-0.3%) continued to decline during the month.

In the first two months of 2021, headline inflation averaged -0.1% compared to +1.5% in the same period last year. Going forward, we continue to expect higher global oil prices, a gradual improvement in economic activity as well as the low base effect since March 2020 to add to some upward inflationary pressure in the months ahead. As part of the PEMERKASA stimulus package, the ceiling prices of RON 95 and diesel will be capped at RM2.05 per litre and RM2.15 per litre from RM2.08 per litre and RM2.18 per litre, respectively, but we believe that the low base of domestic retail petrol prices last year will lead to slightly higher headline inflation this year. However, some downward pressure will likely arise from the ongoing electricity discounts and rebates. We are maintaining our projection for 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 depend on global oil and commodity price developments.

In terms of monetary policy direction, with the expansionary fiscal measures from Budget 2021, PERMAI as well as PEMERKASA packages to support the economic recovery, we expect BNM to leave its OPR unchanged at 1.75% possibly throughout 2021, as the ongoing rollout of the vaccination program in Malaysia may lift business and consumer sentiment.

Source: Affin Hwang Research - 25 Mar 2021