● The headline inflation softened to 3.8% YoY in December, matching house estimate but a tad lower than market expectation (Consensus: 3.9%)

• In 2022, inflation soared to an average of 3.3% YoY (2021: 2.5%; KIBB: 3.3%), its highest level in five years, propelled mainly by higher food prices (5.8%; 2021: 1.7%).
   
• Core inflation: eased for the first time in 15 months to 4.1% YoY (Nov: 4.2%), bringing the full-year rate to 3.0% (2021: 0.7%). The moderation was driven by a marginal fall in core food (8.1%; Nov: 8.2%) and transport (7.3%; Nov: 7.9%) costs.
   
• 4Q22: remain elevated, albeit at a slower rate of 3.9% (3Q22: 4.5%) due to a moderation in fuel prices.
   
• On a MoM basis, both headline and core inflation moderated by 0.2% (Nov: 0.3%) and 0.1% (Nov: 0.4%) respectively.

● The softer growth in CPI was mainly driven by a moderation in food and transport costs

• Food & non-alcoholic beverages (6.8%; Nov: 7.3%): eased to a three-month low due to cheaper prices of food at home (4.9%; Nov: 5.8%), specifically oils (-1.0%; Nov: -0.5%). However, prices of food away from home remained high at 9.6%.
   
• Transport (4.9%; Nov: 5.0%): continue to edged lower on cheaper vehicle prices (2.0%; Nov: 2.1%) and a moderation in the cost of fuels and lubricating equipment (1.8%; Nov: 2.6%). Nevertheless, the price of air fares surged to 41.1% (Nov: 16.1%) due to high demand and shortage of planes during the holiday season.
   
• To note, most indices such as alcoholic beverage & tobacco, health, communication, recreation services & culture and miscellaneous goods & services recorded a negative MoM growth in December, reflecting diminishing price pressure.

● Mixed inflation trend across advanced and developing economies

• US (6.5%; Nov: 7.1%): fell for the sixth straight month in December, attributable mainly to falling energy prices (7.3%; Nov: 13.1%). The continued deceleration in price growth strengthened the case for the Fed to pare down its rate-hike pace.
   
• EU (9.2%; Nov: 10.1%): slowed for a second consecutive month due to a moderation in energy costs (25.7%; Nov: 34.9%). However, an all-time high core inflation reading of 5.2% (Nov: 5.0%) is expected to pressure the ECB to remain hawkish.
   
• China (1.8%; Nov: 1.6%): edged up to a two-month high due to an increase in food prices despite restrained economic activity. Moving forward, inflation is expected to trend higher due to China’s exit from its zero-COVID-19 policy.

● 2023 headline CPI forecast retained at 2.5% (2022: 3.3%), but upside risk to inflation remains

• Headline inflation has already peaked in August 2022 (4.7%) and may continue to trend lower moving ahead due to the strengthening of the ringgit, weaker global demand and supply-chain normalisation. However, a surge in Chinese tourists, coupled with the government’s possible partial removal of certain subsidies (i.e. fuel) in 2H23, may push CPI higher on a monthly basis, but without impacting YoY figure by much amid high-base effect. The same may not be the case for core inflation due to price-stickiness.
   
• After the surprise pause to its normalisation cycle, the BNM is expected to keep the overnight policy rate unchanged at 2.75% for the rest of 2023. Moving forward, the possibility of a rate change decision depends mainly on the inflation trend and growth outlook, as well as any major fiscal policy decision made by the government.

Source: Kenanga Research - 25 Jan 2023