Malaysia: January 2019 consumer price inflation


HIGHLIGHTS

January 2019 consumer price inflation

  • Malaysia recorded a headline inflation of -0.7% yoy for January as the reinstatement of a weekly fuel price float depressed the transport price index.
  • We retain our headline inflation forecast at 1.8% for 2019F due to downward pressure from lower fuel prices and subdued core inflation.
  • The macro backdrop has turned more conducive towards an extended period of policy accommodation; we expect the OPR to remain at 3.25% in 2019F.

First deflation reading in consumer price index since Nov 2009
The consumer price index (CPI) fell at a steeper-than-expected pace of 0.7% yoy in January (+0.2% yoy in December 2018), while core inflation eased to 0.2% yoy (+0.4% yoy in December 2018). On a monthly basis, the headline CPI fell 0.5% mom (+0.1% mom in December 2018). The negative inflation was due to falling prices for goods, while services inflation remained stable at a range of 1.6-1.8% yoy since the re-introduction of the Sales and Services Tax (SST) on 1 Sep 2018.

Falling oil prices depress transport inflation
Seven of the 12 main groups in the CPI basket saw prices decline in January. The sharpest contraction came from the transport index (-7.8% yoy vs. -2.0% yoy in December 2018), which outweighed higher food inflation (+1.1% yoy in January vs. +0.8% yoy in December 2018). As global oil prices declined, the reinstatement of weekly fuel price float saw downward adjustments to RON95, RON97 and diesel retail prices, as reflected in 12.6% yoy decline in fuel & lubricants sub-index (-2.9% yoy in December 2018).

Pricing pressure remains generally weak post GST/SST
Sharper decline in prices were observed for clothing and footwear (-3.3% yoy vs. -3.2% yoy in December 2018), recreation & culture (-0.4% yoy vs. -0.2% yoy in December 2018), and health (-0.5% yoy vs. -0.4% yoy in Dec 2018). Furnishing, household equipment and maintenance group re-joined the deflation group after prices briefly increased at the end of last year (-0.3% yoy vs. +0.1% yoy in December 2018).

Further discounts on KTM fares
Effective for one year from 1 April, an additional 20% discount will be applied to KTM fares, on top of the existing 20% savings for cashless transactions, as the government looks to lower transport costs. The benefit is restricted to Malaysians, and a mechanism for tiered rates is being finalised. Given that the share of rail transport in the CPI basket is below 0.1%, the impact of the discount on headline inflation is negligible.

OPR on hold amid subdued inflation and macro backdrop
We reiterate our headline inflation forecast of 1.8% for 2019F, which sits below Bank Negara Malaysia’s medium-term inflation target of 2-3%. The lack of price pressures, potential downside risks to Malaysia’s economic growth, and a more accommodative external monetary policy backdrop lead us to think that the central bank will maintain its Overnight Policy Rate (OPR) at 3.25% in 2019F.

Originally published by CIMB Research and Economics on 22 February 2019.