● The headline inflation moderated sharply to 2.3% YoY in January, slightly higher than the house forecast but below consensus (KIBB: 2.1%; Consensus: 2.5%; Dec: 3.2%)

• The sudden moderation in inflation rate was partly due to the high base of last year and government’s food price control.
• On a monthly basis, CPI softened marginally (0.3%MoM; Dec: 0.4%) amid a slowdown in food inflation (0.6% MoM; Dec: 1.0%), while core inflation continued to increase to 1.6% YoY (Dec: 1.1%), indicating a rise in economic activities.

● Moderation in transport and electricity costs masked an increase in food prices

• Transport (6.0%; Dec: 9.5%): slowed to an 11-month low due to a sharper drop in transport services cost (-18.9%; Dec: - 15.9%) and a moderation in the price of operation of personal transport equipment (9.1%; Dec: 13.2%).
• Food & non-alcoholic beverages (3.6%; Dec: 3.2%): soared to its highest level since January 2018 due to a sharp rise in the prices of food away from home (3.1%; Dec: 2.2%). However, food inflation moderated by 0.6% MoM (Dec: 1.0%) amid a drop in meat prices (-0.1% MoM; Dec: 0.3%) due to the Keluarga Malaysia Maximum Price Control Scheme.
• Housing, water, electricity, gas & other fuels (0.7%; Dec: 3.4%): eased sharply due to higher base effects.

● Mixed inflation trend across advanced and developing economies

• US (7.5%; Dec: 7.0%): continued to climb for the fifth consecutive month due to a rise in food and used car prices amid the ongoing global supply chain disruptions. To note, the inflation reading came in higher than the consensus view of 7.3%.
• China (0.9%; Dec: 1.5%): softened to a four-month low on the back of falling pork prices (-41.6%; Dec: -36.7%) due to continued oversupply and moderate demand.
• Thailand (3.2%; Dec: 2.2%): surged to the highest level since April 2021, mainly due to higher energy prices. However, the governor of the Bank of Thailand said that inflation in the country will largely be contained as the price pressures in the country are not as broad-based compared to some developed markets.

● 2022 CPI forecast maintained at 2.4% (2021: 2.5%) due to government price controls and subsidies

• Despite rising Brent crude oil price (YTD average: USD89.4/barrel; 2021 average: USD70.9/barrel) and the ongoing global supply chain crisis, Malaysia's inflation rate is expected to hover around the 2.0%-2.5% level in the 1H22 as the government continues to provide fuel (i.e. RON 95, diesel) subsidies and impose price controls on essential goods. However, moving into 2H22, CPI may spike above 3.0% once again due to base effects.
• Bank Negara Malaysia (BNM) is likely to stand pat on overnight policy rate (OPR) at its monetary policy meeting next week (March 3) to sustain domestic economic growth and continue to cushion the impact of the pandemic on the economy. In the near term, we continue to remain cautious amid mounting macroeconomic and geopolitical uncertainties. We maintain our view that BNM may only start to raise the OPR in the 2H22.

Source: Kenanga Research - 25 Feb 2022