Data Highlights

• The overall price level in Malaysia remained stable at 2.0% YoY in August 2023 (130.8 points), the same rate as the previous month. This aligns with our expectations and consensus forecast. August's inflation rate also marked the second time it fell below Malaysia's average long-term inflation rate of 2.1% recorded between January 2010 and August 2023.

• Part of the moderation in inflation can be attributed to the high base effect, as the Consumer Price Index (CPI) saw a substantial 4.7% increase in August last year, which was also the highest level since March 2017. Looking at a monthly basis, inflation in Malaysia rose by 0.2%, compared to a 0.1% increase in the previous month.

• The growth of core-CPI, which excludes volatile items such as fresh food and governmentcontrolled goods, slowed to 2.5% YoY during the month, which is 0.3 percentage points lower than July's figure. Simultaneously, CPI without fuel also moderated, registering a 2.4% YoY increase during the month, compared to a 2.5% annual gain in the previous month. This segment encompasses all goods and services except Unleaded Petrol RON95, Unleaded Petrol RON97, and Diesel.

• Nine states reported inflation rates below the national average of 2.0%. The lowest inflation rate was recorded at 1.5% YoY for Terengganu, Kelantan, Kedah, and WP Labuan. Meanwhile, Sarawak (3.4% YoY), WP Putrajaya (2.7% YoY), and Perlis (2.4% YoY) were among the states with the highest increases in the CPI.

• Breakdown showed 6 out of the 12 CPI baskets (total weightage: 51.2%) posted moderate annual growth, while the other segments registered a sustained growth (Refer Figure 1). 
  o The Food & Non-Alcoholic Beverages index moderated by 4.1% YoY (0.1% MoM) in August 2023, compared 4.4% annual growth previously. The "Food at Home" increased by only 2.9% YoY, slower than 3.0% YoY registered previously. Meantime, “Food away from Home” growth moderated by 5.9% YoY (Jul23: 6.3%). 
  o Other food-related segment such as Restaurants & Hotels also posted moderate growth of 4.7% YoY from 5.0% YoY previously – underpinned by e lower increase in the subgroup of expenditure in restaurants & cafés to 4.5% YoY as compared to 4.9% YoY in July 2023 
  o Transportation cost is unchanged at zero percent due to the lower cost in the subgroup of Operation of Personal Transport Equipment (Aug23: -2.8% YoY; Jul23: -0.8% YoY) but has been offset by the increase cost in transport services such as Passenger transport by air (7.2% YoY) 
  o Inflation for Furnishings, Household Equipment & Routine Household Maintenance moderated by 1.7 % YoY in August 2023 with Furniture & furnishing, carpets & other floor covering subgroup moderated by 0.4% YoY (-0.1% MoM) 
  o Meantime, the sub segments that showed a sustained reading during the month were Alcoholic Beverages & Tobacco, Housing, Water, Electricity, Gas & Other Fuels, Health and Education.
• 8M23, headline inflation averaged at 2.8% YoY and the key contributors to this trajectory were Restaurants & Hotels (6.2% YoY), Food & Non-Alcoholic Beverages (5.7% YoY), Furnishings, Household Equipment, & Maintenance (2.7% YoY), and Miscellaneous Goods & Services (2.8% YoY).
• Despite the moderation, there is a potential for an increase in inflation in the coming months due to several factors: 
  o Diminishing Impact of the Base Effect: Headline inflation has moderated from 4.7% in August 2022 to 3.8% YoY in December 2022. 
  o Recent Surge in Brent Crude Oil Prices: The recent surge in Brent Crude oil prices is likely to affect retail fuel prices, particularly for RON97. This surge is attributed to production cuts by Russia and Saudi Arabia, along with growing demand from China, keeping Brent Crude oil consistently trading above US$90 per barrel since the beginning of the month. As of the latest update, while the prices of RON95 and Diesel remained unchanged from September 21st to 27th, 2023, the cost of RON97 has increased by RM0.10, reaching RM3.47 per liter. 
  o Persistent Weakening of the Ringgit: The prolonged weakening of the Ringgit could exert pressure on inflation, leading to higher imported inflation. However, according to the statistics department, items included in the calculation of the CPI account for less than 10% of the total. 
  o Increase in Imported Rice Prices: There has been a recent hike in imported rice prices, which could place some pressure on headline inflation. However, we believe this pressure can be managed. According to the Prime Minister, the price of local white rice has not increased, and the government will continue to cap the price of local white rice at RM2.60 per kg, the lowest in the region. Rice, as a sub-segment, contributes only 1.1% to the total CPI basket. While the overall impact may seem marginal, we should also consider the potential ripple effect, as it's highly likely that the prices of "food away from home" will increase. Additionally, the possible actions taken by sellers to adjust prices in various food-related segments have not been factored into.
• Based on our current assessment, we are maintaining our projection for the average inflation rate in 2023 at 3.0%, which is in line with the forecasts provided by the government and the central bank, ranging from 2.8% to 3.8%. Year-to-date, we observed a growth of 2.8% and 3.4% for headline and core CPI respectively in the first eight months of 2023. This marks a moderation from last year's highs of 4.7% in August 2023 and 4.2% YoY in November 2023, respectively. Based on these trends, we maintain our conviction that there will be no further interest rate hikes this year.

Source: TA Research - 25 Sept 2023