Data Highlights

• In January 2024, Malaysia's overall price level maintained its stability, showing a YoY increase of 1.5%, mirroring the previous month and came in slightly below consensus expectations of 1.6% YoY gain. The core inflation, which excludes volatile items such as fresh food and government-controlled goods, slowed to 1.8% YoY during the month, compared with 1.9% YoY recorded in the prior month. 

• The index recorded 131.4 points, reflecting a 0.2% rise from the preceding month. This moderation in inflation can be also attributed partly to the high base effect, stemming from a 3.7% increase in January last year. Notably, inflation rate during the month marked the sixth occurrence of falling below Malaysia's average long-term inflation rate of 2.0%, as recorded from January 2010 to January 2024. 

• Starting from January 2024 release, the basket of goods and services of the Consumer Price Index (CPI) has been updated based on the Household Expenditure Survey (HES) conducted for the reference period of 12 months from January to December 2022. There has been a shift from the previous 12 main groups to now 13 main groups. Additionally, there have been slight adjustments in the CPI weightage (as per Figure 1). Two new segments have been introduced: Insurance & Financial Services, (4% of the CPI basket), and Personal Care, Social Protection & Miscellaneous Goods & Services, making up 5.8% of the CPI basket.
   
• 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 Negeri Sembilan with 0.9% YoY, followed by Melaka and Terengganu at 1.0 and 1.1% YoY, respectively. Meanwhile, WP Putrajaya (2.7% YoY), Sarawak (1.9% YoY), and Selangor (1.8% YoY) were among the states with the highest increases in the CPI during the month. 
   
• Breakdown showed that most of the components posted moderate annual growth except Transport and Housing, Water, Electricity, Gas & Other Fuels segments (See Figure 1).
   
  • Inflation for Transport recorded an increase of 0.7% YoY in January 2024 faster than Dec23‘s 0.3% YoY gain). The increases were contributed by the main subgroup of Operation of personal transport equipment, which increased to 1.2% YoY in January 2024 (Dec23: 0.8% YoY). Expenditure class of Fuels & lubricants for personal transport equipment increased to 0.4% YoY as compared to December 2023 (-0.3% YoY).
     
  • The Food & Non-Alcoholic Beverages index moderated by 2.0% YoY (0.3% MoM) in January 2024, compared 2.3% annual growth previously. The "Food at Home" increased by only 1.1% YoY, slower than 1.3% YoY registered previously. Meantime, “Food away from Home” growth recorded a moderate growth of 3.1% YoY, from 3.4% YoY previously.
     
  •  In tandem with moderation of food segment, Inflation for Restaurants & Hotels also moderated by 3.2% during the month, weaker than the 3.7% YoY gain registered in December 2023, contributed by the slower increase in the subgroup of Beverage preparation services, 3.5% YoY (Dec23: 4.0%) and the subgroup of Accommodation services, 2.5% YoY (Dec23: 2.4%)
     
  • Inflation of Housing, Water, Electricity, Gas & Other Fuels group increased 2.0% in January 2024 as compared to the same month of the previous year. This increase was driven by a higher increase in the subgroup of Water supply & miscellaneous services relating to the dwelling (9.3% YoY) as compared to December 2023 (2.4% YoY). The increase in the Sewage service fee item to 58.7% YoY as compared to 7.7% YoY in December 2023 due to the increase in sewage service tariffs that were adjusted to compensate for the increase in operating costs has contributed to this increase.

Our Thoughts 
 

• Over the course of history, Malaysia has witnessed a steady moderation in headline inflation, with the rate of consumer price increases diminishing consistently. Starting from 4.2% in the second half of 2022, it has progressively declined to stay below 2.0% since August 2023. Although core inflation has also followed a downward trajectory, the January’s reading remains relatively high when compared to historical standards (averaging 1.7% from January 2010 to December 2019). 
   
• We expect the inflation rate for February 2024 to remain manageable, like January’s print (TA forecast: 1.6% YoY). This stability can be attributed to the stagnant growth in transportation costs. The price of RON97 has remained unchanged since October 2023 at RM3.47 per litre in February 2024, reflecting a YoY increase of 1.6%, mirroring the rate observed in the previous month. This consistent trend indicates a stagnant growth in the Transport Index. 

• Anticipating a gradual uptick in the CPI, we attribute this forecast to factors such as: 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 of 8.0% for selected items. Our projection closely aligns with the government's forecast, which ranged from 2.1% to 3.6%. Our projection maintains that the CPI will average at 2.9% throughout 2024 (2023: 2.5%). 

• The current inflation situation in Malaysia appears to be well-managed, and there seems to be no immediate pressure from the Bank Negara Malaysia to increase interest rates.The current rate stands at 3.00%, and we believed that the central bank is likely to maintain this stance. Despite the ringgit being at a weakened level and surpassing the resistance level observed on October 23, 2023 (RM4.7937/USD), some market participants are concerned about the possibility of an interest rate hike as a solution.
   
• However, we argue against raising the Overnight Policy Rate (OPR) as a suitable remedy. Such a move could negatively impact consumer income, leading to a slowdown in private spending and, consequently, a potential drag on the entire economy for the year. Furthermore, DOSM indicates that less than 10% of imported goods constitute the CPI basket. Consequently, the weakness in the Ringgit may not have a full impact on headline inflation, as consumers can always find substitute goods, as suggested by "substitution effect." The substitution effect is a fundamental principle in microeconomics that describes how consumers tend to replace one good or service with another when there is a change in relative prices. This effect is particularly associated with the law of demand, which states that all else being equal, as the price of a good decreases, the quantity demanded for those good increases, and vice versa. 
   
• The upcoming second Monetary Policy Meeting of the year for the Bank Negara Malaysia (BNM) is set to take place on 6-7 March 2024. This pivotal event is anticipated to provide insights into the central bank's assessment of economic conditions and its potential monetary policy actions.

Source: TA Research - 26 Feb 2024