Data Highlights

• In December 2023, Malaysia's overall price level exhibited stability, showing a YoY increase of 1.5%, mirroring the previous month and aligning with consensus expectations. The index recorded a value of 131.2 points, reflecting a 0.2% rise from the preceding month. This moderation in inflation can be attributed partly to the high base effect, stemming from a 3.8% increase in the Consumer Price Index (CPI) in December 2022. Notably, December's inflation rate marked the fifth occurrence of falling below Malaysia's average long-term inflation rate of 2.0%, as recorded from January 2010 to December 2023. 

• The core-CPI, which excludes volatile items such as fresh food and government-controlled goods, slowed to 1.9% YoY during the month, compared with 2.0% YoY recorded in the prior month. Simultaneously, CPI without fuel moderated, registering a 1.6% YoY increase during the month, compared to a 1.7% annual gain in the previous month. This segment encompasses all goods and services except Unleaded Petrol RON95, Unleaded Petrol RON97, and Diesel. 

• Most states reported inflation rates below the national average of 1.5% with the lowest inflation rate was recorded at 4 states including Kelantan and WP Kuala Lumpur with 0.9% YoY, followed by Negeri Sembilan and Melaka at 1.0 and 1.1% YoY, respectively. Meanwhile, Sarawak (2.4% YoY), WP Putrajaya (2.1% YoY), and Perak (1.9% YoY) were among the states with the highest increases in the CPI during the month. 

• Breakdown showed that only 3 out of the 12 CPI baskets posted moderate annual growth but those segments contributed a hefty 56.2% share of total CPI basket (See Figure 1):
  • The Food & Non-Alcoholic Beverages index moderated by 2.3% YoY (0.3% MoM) in December 2023, compared 2.6% annual growth previously. The "Food at Home" increased by only 1.3% YoY, slower than 1.4% YoY registered previously. Meantime, “Food away from Home” growth recorded a moderate growth of 3.4% YoY, from 3.9% YoY previously.
     
  • In tandem with moderation of food segment, Inflation for Restaurants & Hotels also moderated by 3.7% YoY in December 2023, weaker than the 4.3% YoY gain registered in November 2023, contributed by the slower increase in the subgroup of Expenditure in restaurants & cafés, 4.0 (Nov23: 4.3%) and the Subgroup of Accommodation Services, 2.4% (Nov23: 4.2%)
     
  • Inflation of Housing, Water, Electricity, Gas & Other Fuels group increased 1.6% in December 2023 as compared to the same month of the previous year. The increase was attributed by the subgroup of Water Supply & Miscellaneous Services relating to the Dwelling (2.4% YoY), Actual Rental for Housing (1.9% YoY) and Maintenance & Repair of Dwelling (0.7% YoY). Nonetheless, this segment moderated slightly from November figure of 1.7% YoY. On a monthly basis, it aas unchanged.
     
  • There is a slight increase in Transportation costs, which rose by 0.3% YoY, attributed to the normalised costs within the personal transport equipment category that increased by 0.8% YoY (compared to 0.2% YoY in November 2023). This uptick is supported by a moderate contraction in lubricants for personal transport equipment, at -0.3% compared to -1.3% YoY previously. Notably, the average price of unleaded petrol RON97 saw a moderate decline of -3.6% YoY (compared to -12.2% in November 2023), reaching RM3.47 per litre as opposed to December 2022's RM3.60 per litre. Meanwhile, the cost of transport services declined by 5.7% YoY, primarily driven by lower costs in passenger transport by air, which experienced an 11.7% YoY decrease.

Our Thoughts

• For the full year, Malaysia's CPI registered a 2.5% YoY increase (TA forecast: 2.7% YoY), reaching 130.4 points, compared to 3.3% YoY in 2022. This rise was primarily propelled by the Food & Non-Alcoholic Beverages group, which saw a lower increase of 4.8% YoY as opposed to 5.8% YoY in 2022. The moderation in inflation can be attributed to the base effect and price stability of key input materials, such as wheat flour, cooking oil, and eggs. Additionally, contributions to the increase came from Furnishings, Household Equipment & Routine Household Maintenance (2.3% YoY); Housing, Water, Electricity, Gas & Other Fuels (1.7% YoY); and Transport (1.1% YoY). 

• Moreover, inflation for the fourth quarter of 2023 eased to 1.6% YoY (compared to 2.0% YoY in the third quarter of 2023). This deceleration was influenced by the lower average price of Unleaded petrol RON97 in the final quarter of 2023 (RM3.47 per litre) compared to RM3.84 per litre in the fourth quarter of 2022. Furthermore, the decrease in the average price of certain food items, particularly vegetables and chicken, also contributed to this slower increase in inflation. 

• We anticipate a probable uptick in the inflation rate for January 2024, driven by the expected higher growth in transportation costs. Despite retail pump prices in January maintaining the same level as December (Average: RM2.56 per litre), they are currently 4 cents higher than a year ago, reflecting a 1.6% YoY increase. This contrasts with the -2.0% YoY contraction observed in December, indicating a faster pace of growth in the Transport Index for January 2024. This acceleration could potentially impact other related segments. 

• As of now, we anticipate an uptick in inflation for 2024, with our current assessment indicating a faster increase compared to last year. However, due to the lower-than-expected inflation for 2023, our base case inflation rate for 2024 now stands at 2.9%, a slight revision from the previous projection of 3.1%. This forecast continues to rely on the same assumptions, taking into consideration: 1) the expected hike in retail pump prices – possibly in the second half; 2) a potential upside bias in crude oil prices; 3) the build-up of demand-side pressure in tandem with improved growth prospects; and 4) the implementation of higher SST rate to 8.0% for selected items. Our projection closely aligns with the government's forecast, which ranged from 2.1% to 3.6%. 

• The latest development is that the subsidy rationalisation will be decided by this week. The Cabinet will decide on the mechanism for targeted subsidies and this is expected to drive registration under the Central Database Hub (Padu). The mechanism to be decided upon entails the type of subsidy, the amount and eligible recipients. 

• In addition, the proposed water tariff increase is anticipated to contribute to the inflationary pressures within the water sub-segment of the Consumer Price Index (CPI) basket. However, our observation suggests that the overall impact on headline inflation is likely to be marginal, considering the water sub-segment's relatively small percentage share of 0.9%. The correlation between the water sub-segment and headline inflation is also minimal, standing at 16.6%. 

• Nevertheless, if retailers decide to pass on the increased costs resulting from higher water tariffs, it could contribute to an overall spike in prices across the economy. This inflationary pressure may not only impact the specific goods directly linked to water-dependent industries but can also create a ripple effect, affecting a wide range of products and services. That being said, to mitigate the negative consequences of opportunistic pricing strategies, it is crucial for regulatory bodies to monitor and enforce fair business practices. Authorities should scrutinize price increases following water tariff hikes to ensure that retailers are not taking advantage of the situation. 

• The upcoming first Monetary Policy Meeting of the year, hosted by Bank Negara Malaysia on Wednesday, is anticipated to maintain the Overnight Policy Rate at its current level of 3.0%. During the meeting, the central bank may provide insights into the recent Advanced Estimate of Gross Domestic Product by the Department of Statistics. Additionally, we anticipate further comments or outlook from Bank Negara Malaysia on the trajectory of inflation in the coming months.

Source: TA Research - 23 Jan 2024