KUALA LUMPUR (Aug 22): Malaysia's inflation, as measured by the consumer price index (CPI), is expected to remain subdued, thanks to government incentive support, according to economists.

The CPI rose 2% year-on-year (y-o-y) in July, driven mainly by higher restaurant prices, although key food items increased at a slower pace, the Department of Statistics Malaysia reported on Thursday.

The inflation rate has remained steady since May, and was slightly below the median 2.1% y-o-y increase predicted in a Bloomberg survey of economists.

"Although inflation stabilised in July, we anticipate rising inflationary pressures across all states, largely due to the implementation of targeted diesel subsidies," MIDF Research noted in a report.

However, the research house expects this upward pressure to be managed, supported by targeted government incentives and proactive measures to monitor price changes. As such, it forecasts inflation to moderate to 2.3% in 2024.

MIDF also expressed caution regarding rising costs in restaurants and hotels, which were the main contributors to inflation in Sabah and Sarawak, despite stable diesel prices expected to minimise transportation cost impact on the regions.

RHB Investment Bank (RHB IB), meanwhile, also revised its inflation projection downwards to 2.1% from 2.6%, expecting core inflation to average 2% in 2024. This revision considers the minimal impact of diesel price and utility tariff changes, a delay of RON95 petrol subsidy cuts until at least late 2024, and slower-than-expected year-to-date inflation.

RHB IB noted that future inflation will depend on the timing and extent of RON95 subsidy adjustments, demand impact from pension fund withdrawals, and global commodity and food price increases.

Additionally, a planned increase in civil servant salaries in December 2024 could contribute to inflationary pressures, RHB IB noted, adding that it will monitor potential fiscal measures, including RON95 subsidy changes, in the upcoming Budget 2025 announcement.

Meanwhile, UOB Global Economics and Markets Research estimated an average inflation rate of 2% this year, factoring in the impact of government subsidy reforms, including fuel.

UOB identified factors such as base effects, potential subsidy cuts, Employees Provident Fund (EPF) withdrawals, and civil servant salary hikes as risks to future inflation.

"Nevertheless, the government’s mitigation measures and coordinated actions to counter profiteering have helped to control price pressures so far," UOB noted.

The firm also believes that Bank Negara Malaysia does not view rising inflation as a major concern currently, and expects the central bank to maintain its interest rate pause at 3% for the rest of the year.

Both MIDF and RHB IB anticipate that RON95 petrol subsidy rationalisation will begin in the fourth quarter of this year.

MIDF noted that while the subsidy changes are expected to start in the fourth quarter, moderate price increases earlier in the year suggest limited spillover effects from policy changes.

"Consequently, this will help keep the overall full-year CPI under control, and mitigate potentially higher inflationary pressures in the latter part of the year," MIDF added.

RHB IB also expects the RON95 subsidy reform to be delayed until late 2024 or later.

The government may assess the delayed impact of diesel price adjustments and other fiscal measures, such as revisions of services tax and utility tariffs, before proceeding with RON95 petrol subsidy rationalisation, it said.

With the current RON95 price at RM2.05 per litre compared with an unsubsidised price of RM3.30, RHB IB estimated a potential inflation increase of 3.05 percentage points.

Therefore, the house suggested that any adjustments to the RON95 subsidy are likely to be gradual to manage the substantial impact on inflation and consumer spending.  

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