Data Highlights

• Malaysia experienced a stable overall price level in June 2024, with a sustained increase of 2.0% YoY, mirroring the growth rate of the previous month. MoM, it was up 0.2% (Apr24: 0.3% MoM). Meanwhile, core inflation in June 2024 increased by 1.9% YoY, maintaining the same rate in the prior month.

• We had anticipated that inflation could be slightly higher (Consensus, TA: 2.2% YoY) after the government removed price caps on diesel. Though the direct impact is likely limited since diesel does not have a big weighting in the CPI basket at 0.2%, we will continue watching inflation prints closely for second-round effects.

• June CPI numbers also confirm that Malaysia's price pressures remain in check for now, with the DOSM noting that it has one of the lowest rate of inflation in the region: Vietnam (4.3% YoY), Philippines (3.7% YoY), Indonesia (2.5% YoY) and Republic of Korea (2.4% YoY). However, our inflation rate is higher than Thailand (0.6% YoY) and China (0.2% YoY).

• By state, most recorded increases below the national inflation level of 2.0%. However, four states recorded increases above the national inflation level namely Pulau Pinang (3.3% YoY), Sarawak (2.7% YoY), Pahang (2.7% YoY) and Selangor (2.4% YoY).

Details

• Six components demonstrated accelerated annual growth, compared to four previously, namely, (1) Food & Beverages; (2) Alcoholic Beverages & Tobacco, (3) Furnishings, Household Equipment & Maintenance; (4) Transport; (5) Education; and (6) Restaurants & Accommodation Services. These groups contributed significantly, accounting for 52% of the total CPI basket (refer to Figure 1).
   
  • The Food & Beverages group rose by 2.0% YoY in June 2024, up from 1.8% YoY in May 2024. Out of 247 Food items, 155 items (62.8%) recorded price increases as compared to June 2023. The main subgroup of Food at Home, which contributes 52.0% of total Food & Beverages group weight increased marginally to 0.9% YoY compared to 0.5% YoY recorded in May 2024. Meanwhile, the main subgroup of Food away from home increased by 3.3% YoY as compared to 3.4% YoY in the previous month.
     
  • Inflation for Transport recorded an increase of 1.2% YoY in June 2024 as compared to May 2024 (0.9% YoY). The increase was contributed by the main subgroup of Operation of personal transport equipment which increased to 1.7% in June 2024 (May24: 1.4% YoY). This increase was in line with the rise in the average price of Unleaded Petrol RON97, RM3.47 per litre (Jun23: RM3.37 per litre) and Diesel in Peninsular Malaysia, RM2.99 per litre (Jun23: RM2.15 per litre). Starting 10 June 2024, the retail price of Diesel for Peninsular Malaysia has been set at RM3.35 per litre as compared to RM2.15 per litre. Nevertheless, the retail price of Diesel in Sabah, Sarawak and Wilayah Persekutuan Labuan remains at RM2.15 per litre.
     
  • Inflation for Furnishings, Household Equipment & Routine Household Maintenance increased by 0.9% YoY as compared to 0.8% YoY as recorded in May 2024. The increase was contributed by the main subgroup of Goods & services for routine household maintenance (1.7% YoY) and Tools & equipment for house & garden (1.5% YoY). Among the items of Furnishings, Household Equipment & Routine Household Maintenance that recorded increases were Softeners include fabrics softener (8.2% YoY), Electric bulb (3.7% YoY), Washing powder (3.4% YoY), Portable fan (3.2% YoY) and Home decorative mirror (3.0% YoY)
     
  • Inflation for Restaurant & Accommodation Services increased at 3.3% YoY in June 2024 as against 3.2% in May 2024. This was contributed by the increase in the main subgroup of Beverage preparation services, 4.2% (May24: 4.1%) and Accommodation services, 0.3% (May24: 0.1%)

Our Thoughts

• For the first half of the year, headline inflation averaged 1.8% YoY to 132.3 points. The key contributors to this trajectory were Restaurant & Accommodation Services (3.1% YoY), Housing, Water, Electricity, Gas & Other Fuels (2.9% YoY), Health (2.1% YoY), and Food & Beverages (1.9% YoY).

• Currently, we expect the inflation rate for July 2024 to remain manageable, likely aligning with our current forecast of 2.1% YoY. It is worth mentioning that the impact of the diesel price hike is relatively lower than our estimation. This stability can be attributed to stagnant growth in transportation costs. For now, the prices of all types of fuels have remained unchanged. This consistent trend indicates stagnant growth in the Transport Index and its related segments.

• Regarding fuel subsidy rationalisation, the Prime Minister recently stated that the rationalisation of the RON95 subsidy remains off the table for now, as the government wants to ensure the public fully understands the implementation of targeted diesel subsidies. This is beneficial for consumers as it protects their disposable income. Consequently, personal spending expenditure will continue to grow sustainably, reducing downside risks. While reducing the debt-to-GDP ratio is a key concern for Malaysia, the PM mentioned that various measures are being taken to boost government revenue, including prudent spending and borrowing only when necessary for development purposes.

• Our anticipated 2024 CPI forecast of 3.3% YoY assumes that the price of RON95 will increase by RM0.40 per litre starting in the final quarter of this year, along with its ripple effect. A rise in prices of a more widely used fuel, RON95, will likely cause a much bigger inflationary splash but political considerations make it hard to say with much certainty when that cut might come.

• Nonetheless, if the subsidy rationalisation is indeed off the table, the new CPI projection may be much lower. While we are still uncertain about the government's firm stance on this matter, we believe that the average of CPI this year could fall within a range of 2.5%-3.0%, with a midpoint of 2.7%. Under this scenario, we may see prices increase to 2.6% YoY in the second half of the year (1H24: 1.8% YoY),

• Factors contributing to this forecast include demand-side pressure building up in conjunction with improved growth prospects. The Malaysian economy is expected to surpass expectations in the second quarter, with a growth of 5.8% YoY (Consensus: 4.7% YoY, TA: 5.5% YoY), according to the DOSM Advanced Estimates. In addition, the current inflation situation in Malaysia appears to be well-managed, and there seems to be no immediate pressure from the central bank to increase interest rates. The current OPR stands at 3.0%, and we believe that the central bank is likely to maintain it.

Source: TA Research - 25 Jul 2024