● The headline inflation surged to a one-year high of 3.4% YoY in June, exceeding expectations (KIBB: 3.1%; Consensus: 3.2%; May: 2.8%)

- Elevated food and energy costs due to the global supply chain constraints and higher tourism-led spending due to the reopening of international borders were one of the main drivers of rising consumer prices in 2Q22 (2.8%; 1Q22: 2.2%).

- On a monthly basis, CPI increased at an unchanged rate of 0.6% MoM despite elevated food (1.2% MoM; May: 0.9%) and restaurant & hotel costs (1.3% MoM; May: 0.6%), while core inflation hit 3.0% YoY for the first time since March 2016.

● Higher growth in inflation was mainly attributable by rising food, transport and restaurant & hotel prices

- Food & non-alcoholic beverages (6.1%; May: 5.2%): accelerated to its highest level since April 2009 amid a rise in prices of both food at home (6.1%; May: 5.5%) and away from home (6.6%; May: 5.1%), especially fresh meat and coffee.

- Transport (5.4%; May: 3.9%): rose to a five-month high due an increase in fuels and lubricating equipment price (6.4%; May: 4.9%) and a much slower YoY decline in cost of transport services by air (-4.1%; May: -20.5%).

- Restaurant & hotel (5.0%; May: 3.7%): soared to a near eight-year high on higher expenses in restaurants and cafes (5.2%; May: 3.8%) and increasing accommodation services cost (4.8%; May: 3.1%).

● Rising inflation across advanced and developing economies due to high food and petrol costs

- US (9.1%; May: 8.6%): exceeded expectation as prices for food at home rose to its highest level since April 1979 in June (12.2%; May: 11.9%), while energy prices continued to accelerate to 41.6% (May: 34.6%) due to higher fuel costs.

- EU (8.6%; May: 8.1%): soared to a new record high due to a substantial increase in energy costs (42.0%; May: 39.1%) and increasing food prices (8.9%; May: 7.5%) amid the ongoing Russia-Ukraine war.

- Indonesia (4.4%; May: 3.6%): increased to a five-year high as food inflation continued to climb higher. However, core inflation remained relatively low at 2.63% (Consensus: 2.72%; May: 2.58%).

● 2022 headline inflation forecast maintained at 3.3% (2021: 2.5%) due to external and domestic price pressures

- Inflationary pressure is expected to persist in the near term due to the continued uncertainty in the global supply chain amid the unabated war between Russia and Ukraine. Domestically, shortage of foreign workers and increasing consumer demand may also exert upward pressure on prices. These factors, coupled with the low-base effect may push Malaysia’s inflation rate to near the 5.0% level on average in 3Q22. However, Bank Negara Malaysia’s (BNM) back-to-back overnight policy rate (OPR) increase of 25 basis points (bps) and falling global commodity prices as evidenced by declining S&P GSCI and Bloomberg Commodity indices may help to alleviate price pressures.

- In line with the global monetary policy normalisation, the BNM may continue to tighten its monetary policy by increasing the OPR by a total of 50 bps in the next two remaining meetings in 2022 to curb demand for big-ticket items. However, rising global recessionary risk may dim Malaysia’s growth outlook and prompt BNM to shift to a dovish stance.

Source: Kenanga Research - 25 Jul 2022