Malaysia: June 2018 consumer price inflation

By Michelle Chia, Economist, CIMB Research and Economic and Lim Yee Ping, Economist, CIMB Research


HIGHLIGHTS

June 2018 consumer price inflation

  • Both headline and core inflation decelerated sharply in June (+0.8% yoy and +0.1% yoy, respectively) following the zero-rating of GST on 1 June.
  • All but transport components saw falling price gains. Transport inflation accelerated despite unchanged RON95 and diesel prices, due to lower base effect a year ago.
  • Benign food inflation can also be attributed to the Price Control Scheme for Aidilfitri 2018, which took effect on 8-22 June.
  • We maintain our 2018F inflation forecast of 1.3%, and Overnight Policy Rate (OPR) at 3.25%.

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Inflation eases in all key components, but…
The reduction of Goods and Services Tax (GST) from 6% to 0%, effective 1 June, has resulted in a drastic deceleration in both headline and core inflation. The headline inflation eased more than expected to 0.8% yoy in June (CIMB: +1.1% yoy, Bloomberg consensus: +1.3% yoy, May: +1.8% yoy), the smallest increase since Feb 2015, whereas core inflation moderated to 0.1% yoy (+1.5% yoy in May). On a seasonally-adjusted basis, headline CPI fell 1.2% mom in June (+0.2% mom in May).

… lower base effect lifts transport inflation
All key components saw falling price gains, except for the transport component. Transport inflation quickened to 5.5% in June (+3.8% yoy in May) due to rising fuels and lubricants inflation (+10.2% yoy vs. +5.3% yoy in May) and passenger airfares (+3.7% yoy vs. +2.4% yoy in May) as a result of lower oil prices last year. Meanwhile, Price Control Scheme for Aidilfitri 2018, which took effect on 8-22 June, also contributed to benign food inflation (+0.8% yoy in June vs. +2.2% yoy in May) alongside the GST effect.

10% sales tax and 6% services tax to be reintroduced on 1 September
A survey by National Price Council under the Ministry of Domestic Trade and Consumer Affairs revealed that the prices of 72% of consumer goods declined by up to 13% since the GST was lowered to 0%. The zero-rated GST will last until end-August, after which the government will implement a 10% sales tax and a 6% services tax effective 1 September 2018.

Monetary policy to stay accommodative amid benign inflation outlook
In our view, the inflation outlook is likely to remain subdued in 2H18 (+1.6% yoy in 1H18) even after taking into account the reintroduction of SST on 1 Sep 2018. Effective 1 July to 31 December 2018, TNB will implement a 1.35 sen per kWh surcharge on electricity tariffs, to account for higher fuel and generation costs under the Imbalance Cost Pass-Through (ICPT) mechanism. Nonetheless, households with monthly consumption above 300kWh will be spared from the ICPT surcharge as it will be funded by Kumpulan Wang Industri Elektrik. In the meantime, Telekom Malaysia has recently offered an entry plan for the B40 group (with monthly household income not exceeding RM4,500), as well as speed upgrades for existing broadband subscribers, which effectively translate to lower broadband prices per Mbps, pointing to the absence of inflation risk in the near-term. Hence, we maintain our 2018F headline inflation forecast at 1.3% yoy (+3.7% yoy in 2017). With inflation rate remaining below Bank Negara Malaysia (BNM)’s forecast of 2- 3%, we expect the central bank to leave Overnight Policy Rate (OPR) unchanged at 3.25% for the rest of 2018.

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Originally published by CIMB Research and Economics on 18 July 2018.