KUALA LUMPUR (July 24): Malaysia’s headline inflation, which came unchanged year-on-year at 2% in June, is projected to remain steady for the rest of 2024, on the muted impact from the recent diesel subsidy rationalisation, analysts said.

The 2% increase in consumer price index (CPI) in June was lower than the 2.2% increase predicted in a Bloomberg survey, despite the removal of retail diesel subsidies in Peninsular Malaysia implemented last month.

Malaysia floated retail diesel prices on June 10, in an effort to address its ballooning subsidy bills and curb smuggling activities.

The decision put a spotlight on its impact towards prices. Efforts to curb price shocks include targeted subsidy to approved transportation fleets and logistic companies.

Following the lower-than-expected CPI, UOB Research has revised its inflation projection to 2% in 2024 (from 2.6% previously), it said in a note on Wednesday.

The research house said it has “recognised a much smaller-than-anticipated impact from the diesel subsidy rationalisation and benign inflation reading of an average 1.8% in the first half of 2024 (1H2024)".

However, inflation risks are still tilted to the upside pending RON95 fuel subsidy rationalisation, the effects of Employees Provident Fund (EPF) withdrawals from recently-introduced Account 3, and salary hikes for civil servants, it said.

HSBC Global Research also described the June CPI print to have delivered “a downside surprise” despite the diesel subsidy rationalisation.

The research house expects Malaysia’s inflation to fall within Bank Negara Malaysia’s (BNM) forecast of between 2% and 3.5% this year, citing the country’s consistent benign inflation, coupled with better growth prospects.

It has forecast Malaysia’s CPI in 2024 to be at 2.4%, according to its past reports.

“The direct impact [of diesel subsidy] should be limited, as diesel only accounts for 0.2% of the CPI basket. The indirect impact, which is the primary concern, appears to have been contained too. This is due to the mitigating impact the government has put in place in tandem with the removal of diesel subsidies,” it said in its latest note.

Sharing the same view, RHB Research said that the direct impact of diesel subsidy float in Peninsular Malaysia would be “marginal”. The research house maintained its headline inflation projection at 2.6% in 2024.

"The diesel price float would have a minimal potential for significant inflationary effects, given that diesel weight to overall headline CPI is a mere 0.2%. 

"Subsidies will continue for most of the diesel-powered commercial vehicles and for public transportation and most of Malaysia’s motor vehicles consume petrol [accounts for 90% of the vehicles registered with Malaysian Road Transport Department] as their primary fuel choice versus diesel users at around 7%," it explained.

Meanwhile, MIDF Research has kept its headline inflation forecast of 2.7% in 2024. The research house arrived at its latest forecast in May, a downward revision from 3.2% forecast earlier.

The higher-than-street forecast is in anticipation of gradual inflation pickup in Peninsular Malaysia in 2H2024 from the diesel subsidy retargeting.

"However, we believe the upward pressure will remain manageable due to targeted incentives provided by the government to selected and eligible industry players," it said.

As for Sabah and Sarawak, MIDF expects minimal transportation price pressure as diesel prices remain unchanged, it added. 

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