● The headline inflation slowed slightly to 3.2% YoY in December, higher than expectation (KIBB: 3.0%; Consensus: 3.1%; Nov: 3.3%)

- The average headline CPI more than doubled in 2021 (2.5%; 2020: 1.2%), matching house forecast. The increase in inflation was mainly due to rising global commodity prices amid the COVID-19-driven supply chain bottlenecks and post-reopening pent-up demand.

- On a monthly basis, CPI rose marginally by 0.4% (Nov: 0.2%), while core inflation continued to increase to 1.1% YoY (Nov: 0.9%), signalling a normalisation in economic activities.

- 4Q21 (3.2%; 3Q21: 2.1%): highest since 4Q17 (3.5%) due to the reopening of the domestic economy in October.

● Higher growth in food prices was offset by a slower growth in transport costs

- Food & non-alcoholic beverages (3.2%; Nov: 2.7%): soared to a near four-year high despite the implementation of the Keluarga Malaysia Maximum Price Control Scheme (effective Dec 7). The rise was attributable to an increase in prices of food at home (4.1%; Nov: 3.6%), especially fish and seafood, milk, cheese and eggs, fruits and vegetables.

- Transport (9.5%; Nov: 12.7%): eased to a 10-month low, partly due to a slower rise in fuels and lubricating equipment prices (19.4%; Nov: 27.6%).

● Mixed inflation growth trend across advanced and developing economies

- US (7.0%; Nov: 6.8%): increased by the most in nearly 40 years due to higher rental accommodation and used car prices, bolstering expectations that the Fed may start to raise interest rate soon.

- EU (5.0%; Nov: 4.9%): hit a new record high in December on the back of rising energy and food prices. To note, Estonia ranked first in the EU, with a 12.0% inflation rate.

- China (1.5%; Nov: 2.3%): moderated to a three-month low as food prices fell by 1.2% (Nov: 1.6%) amid a recovery in the supply of vegetables and pork.

● We retain our 2022 headline inflation forecast at 2.4% (2021: 2.5%) but remain cautious amid the pandemic uncertainty

- The headline inflation rate is expected to moderate slightly to 2.4% in 2022 mainly due to last year’s high base effect. Despite the expectations that supply chain disruptions may gradually ease in the 2H22, we may continue to see a rise in food and energy prices due to rising consumer demand as the economy continues to recover from COVID-19. To add, the continuation of China’s zero-COVID-19 policy and a potential new wave of the pandemic may add pressure on prices.

- The Bank Negara Malaysia (BNM) will continue to cushion the economic impact of COVID-19 by maintaining an accommodative monetary policy stance until at least the 3Q22. With the expectation that economic growth would continue to improve amid a stronger recovery in domestic demand, we reckon that the BNM may hike the overnight policy rate at least twice in the 2H22 to 2.25%.

Source: Kenanga Research - 24 Jan 2022