● The headline inflation remained unchanged at 4.0% YoY in November, matching house estimate but a tad higher than market expectation (Consensus: 3.9%)

- Price pressure has remained fairly muted, partly due to base effect, however food costs have continued to climb due to higher meat prices, increasing by 0.7% MoM (Oct: 0.5%), pushing the monthly CPI reading higher to 0.3% (Oct: 0.2%).

- Core inflation: soared to a new all-time high of 4.2% YoY (Oct: 4.1%) since data was made available from January 2015, mainly due to a continued increase in food (8.2%; Oct: 7.9%) and recreation services (3.6%; Oct: 3.4%) costs. Of note, core prices surged by 0.4% MoM (Oct: 0.1%).

● Higher food costs were partially offset by a slowdown in transport prices

- Food & non-alcoholic beverages (7.3%; Oct: 7.1%): accelerated to its highest level since April 2009, attributable mainly to rising food away from home (9.6%; Oct: 9.3%) and fresh meat (8.0%; Oct: 6.9%) prices, especially chicken (RM10.36; Oct: RM10.07).

- Transport (5.0%; Oct: 5.2%): edged lower due to a moderation in the cost of operation of personal transport equipment, specifically costs of fuels & lubricating equipment (2.6%; Oct: 3.4%) and parts and accessories (7.6%; Oct: 8.3%).

- Housing, water, electricity, gas & other fuels (1.4%; Oct: 1.5%): moderated to a 5-month low due to a high base effect. However, prices increased by 0.2% MoM (Oct: 0.0%) amid an increase in rental cost (0.2%; Oct: 0.0%).

● Mixed inflationary trend across advanced economies

- Japan (3.8%; Oct: 3.7%): despite a wide range of government measures, inflation climbed to its highest level since January 1991, mainly due to higher prices for imported raw commodities amid a weak yen.

- US (7.1%; Oct: 7.7%): cooled further in November, registering below market expectation of 7.3%, mainly due to a fall in energy and used vehicle prices. However, it is to note that shelter and food costs continued to rise MoM.

- EU (10.1%; Oct: 10.6%): slowed less than market consensus of 10.0%, strengthening the case for tighter European Central Bank’s policy to curb price pressures. To note, the drop in CPI was mainly due to lower energy prices (34.9%; Oct: 41.5%).

● We retain our 2022 headline inflation forecast at 3.3% (2021: 2.5%) and project inflation to moderate to 2.5% in 2023

- Despite our expectation that core prices may start to trend lower in the next few months due to a drop in prices of imported inputs amid strengthening ringgit and slowing global demand, risks remain skewed to the downside due to elevated economic uncertainties. However, inflation may start to ease in 2Q23 as the new government made tackling the rising cost of living its priority while maintaining subsidies till at least end of 2Q23. This, coupled with the eventual reopening of China and the normalisation of supply chain may bring the CPI down to 2.5% on average in 2023.

- BNM is expected to raise the overnight policy rate (OPR) by another 25 basis points in January 2023 to further realign with the global monetary tightening trend and to curb the persistently high core inflation. However, we currently assign only a 50.0% probability of another similar sized rate hike in March due to growing global economic uncertainty and a potential domestic slowdown later in the year. As such, we reckon that the terminal rate would be around 3.00 – 3.25%, in line with the long term OPR average, after which we expect BNM to keep it unchanged for the rest of 2023.

Source: Kenanga Research - 27 Dec 2022