Data Highlights

• Malaysia experienced a stable overall price level in July 2024, with a sustained increase of 2.0% YoY (Consensus, TA: 2.1% YoY), mirroring the growth rate of the previous month. MoM, it was up 0.1% (Jun 24: 0.2% MoM).

• Meanwhile, core inflation in July 2024 increased by 1.9% YoY, maintaining the same rate in the prior month.

• For inflation at the state level, most of the states recorded increases below the national inflation level of 2.0%. However, four states recorded increases above the national inflation level namely Pulau Pinang (3.4% YoY), Sarawak (2.7% YoY), Pahang (2.6% YoY) and Selangor (2.4% YoY).

• In comparison to other selected countries, inflation in Malaysia was lower than Vietnam (4.4% YoY), Philippines (4.4% YoY), Republic of Korea (2.6% YoY), Eurozone (2.6% YoY) and Indonesia (2.1% YoY). However, the rate was higher than Thailand (0.8% YoY) and China (0.5% YoY). Details

• Six components demonstrated accelerated annual growth, namely, (1) Alcoholic Beverages & Tobacco, (2) Health; (3) Information & Communication; (4) Recreation, Sport & Culture; (5) Restaurants & Accommodation Services; and (6) Personal Care, Social Protection & Miscellaneous Goods & Services. Although half of the CPI basket recorded a faster growth, these groups contributed for only 23.4% of the total CPI basket (refer to Figure 1), while the largest contributor, the Food & Beverages index (29.8% of total CPI) moderated during the month.

• Food & Beverages group recorded a moderate increase at 1.6% YoY (Jun24: 0.9% YoY). Out of 247 Food items, 147 items (59.5%) recorded price increases as compared to July 2023. The main subgroup of Food at home, which contributes 52.0% of total Food & Beverages group weight increased slower to 0.3% YoY as against 0.9% YoY recorded in June 2024. Meanwhile, the main subgroup of Food away from home also increased slower to 3.2% (Jun24: 3.3% YoY).

• Transport recorded an increase of 1.2% in July 2024, the same rate as recorded in June 2024. The increase was contributed by the main subgroup of Operation of personal transport equipment, which increased to 1.8% in July 2024 (Jun24: 1.7%). Expenditure class of Fuels & lubricants for personal transport equipment increased to 1.2% as against 0.9% in June 2024. Diesel and Unleaded petrol RON97 increased to 22.6% and 2.9% YoY, respectively.

• Inflation for the Housing, Water, Electricity, Gas & Other Fuels increased at the same rate of 3.2% as recorded in June 2024. This increase was driven by a higher increase in the subgroup of Water supply & miscellaneous services relating to dwelling (32.1%). Expenditure class of Water supply continued to increase 32.0% at the same rate as recorded in June 2024.

• On the other hand, inflation for Restaurant & Accommodation Services increased at a faster rate pf 3.4% in July 2024 (Jun24: 3.3% YoY). This was contributed by the increase in the main subgroup of Beverage preparation services, 4.3% YoY (Jun24: 4.2% YoY) and Accommodation services, 0.1% YoY (Jun 24: 0.3%).

• Other groups that showed an upside during the month were Insurance & Financial Services, and Personal Care, Social Protection & Miscellaneous Goods & Services. Both segments recorded an increase of 0.5% and 3.2% YoY, respectively. For Insurance & Financial Service, the subsegment of Insurance rose by 0.5% YoY, while Insurance connected with transport increased by 0.8% YoY. Our Thoughts

• In 7M24, headline inflation averaged 1.8% YoY to 132.4 points and the key contributors to this trajectory were Restaurant & Accommodation Services (3.2% YoY), Housing, Water, Electricity, Gas & Other Fuels (2.9% YoY), Personal Care, Social Protection & Miscellaneous Goods & Services (2.8% YoY), Health (2.1% YoY), and Food & Beverages (1.8% YoY).

• Currently, we expect the inflation rate over the next few months to remain manageable, likely staying within the long-term average of 2.0% YoY (Jan 12 – Jul 24), provided there are no adjustments to fuel prices, particularly for RON95. However, if fuel prices rise, with the government potentially increasing the ceiling price by RM0.40, we anticipate an impact on fuel-related sectors such as Food & Beverages and Restaurant & Accommodation Services. This could drive monthly CPI changes above the 3% level, with ripple effects extending across the economy.

• If the petrol subsidy rationalisation is indeed off the table or comes later than our expectations, the CPI projection may be lower, potentially falling within a range of 2.5% to 3.0 YoY. Hence, we may see inflation averaging 2.6% YoY in the second half of the year, higher than 1H24’s reading of 1.8% YoY. Low base effect will partly play some role as the CPI rose by only 1.8% YoY in 2H23. The Bank Negara Malaysia forecast a headline inflation rate of 2.0% YoY to 3.5% YoY in 2024, with core inflation at 2.0% YoY to 3.0% YoY.

• While the CPI increase may temporarily impact the overall economy, we believe this effect will be short-lived as conditions stabilise. Government efforts, such as raising public sector wages, potentially increasing the minimum wage to RM1,500 (minimum wage to be reviewed soon), providing cash assistance, and monitoring price levels in Malaysia will help sustain the economy. Furthermore, narrowing the fiscal deficit is a key priority, which should improve market sentiment. Consequently, fuel subsidy reform remains essential, alongside a broader review of various subsidies to ensure that funds are better targeted toward disadvantaged groups in the society and revenue generating measures.

• Also expect no change in OPR until year end. The next MPC meeting is on 4-5 September 2024.

Source: TA Research - 23 Aug 2024