HIGHLIGHTS

Inflation in March remained at 3.5% YoY, matching market expectations, as multiple cost-push pressures ranging from an increase in the electricity tariff to the implementation of minimum wage and the continued normalization period of a petrol price hike continues to keep overall prices elevated. The core inflation (minus food and beverages) also remained at 3.3%. For the 1Q14, the CPI averaged at 3.4% and on a monthly comparison, the CPI rate rose by 0.1% MoM.

The prices of food and beverages ticked up slightly to 3.9% YoY from 3.8% in February. On a monthly comparison, it only saw a 0.1% increase. Prices of food and beverages have finally normalized following the festivals in the first couple of months of the year. On broader scope, the global food inflation as measured by the United Nation’s Food & Agriculture Organization (FAO) saw a 2.3% MoM increase driven by unfavourable weather conditions effecting crops and geopolitical tension spiking worries of scarcity around the Black Sea region. Compared to last year however, food prices fell by 1.0%.

The housing, water, electricity, gas and other fuels index rose by 3.6% YoY (February: 3.5%) and by just 0.1% MoM. This index has been significantly above its long-term average of 1.6% YoY due to the rise in electricity tariff at the start of the year. Starting the 1st of May, there will be further inflationary pressures from the 20% rise in natural gas prices. Though not expected to directly impact the average residential consumer, it would impact those in the commercial and industrial sector, of which pricing will eventually be incurred towards the average consumer.

The transportation index moderated to 5.1% from 5.5% previously. Though the annual increase still remains elevated, the 0.2% MoM increase is evidence that prices have normalized since the petrol price hike at the end of 2013. We think that this index would remain steady for a while yet. Though there is every possibility of another petrol subsidy rationalization, following the most recent hike in electricity tariffs and natural gas, it would be wise for the government to at least allow prices to normalize again before adding on further inflationary pressures to the economy. Sacrificing economic growth just for the sake of reigning in public debt will end up backfiring the government target to achieve a developed status by 2020. Removing too much subsidies too fast is also a double-edged sword, as the government will have to provide further financial assistance (currently in the form of BR1M) to buffer inflationary pressures.

On broader view, the price of Brent ended the month at US$107.8 (-2.1% YoY) whilst U.S crude settled at US$101.6, 4.5% higher than last year. Prices of crude have been on the rise due to tensions in Ukraine. U.S. crude last settled at US$103.8/barrel and Brent at US$109.6/barrel.

Outlook

 Moving forward there could be another slight spike in inflation due to increase of natural gas price. However, we do not think it will be as big as an impact as a petrol subsidy rationalization. Nonetheless, it will put further inflationary pressures to the economy, keeping the average CPI above the long-term norm. We reckon it would average around 3.3% this year. Due to the fact that the high inflation is cost-push, we do not believe that BNM will change the Overnight Policy Rate from 3.00% any time soon and possibly retaining it into the later part of 2015. Currently, it is a matter of riding out the tide whilst waiting for prices to normalize again. 

Source: Kenanga