Malaysia: May 2018 consumer price inflation

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


HIGHLIGHTS

May 2018 consumer price inflation

  • Malaysia’s headline inflation inched up to 1.8% yoy in May, largely due to transport inflation and rental revisions.
  • We revise down our 2018F CPI forecast from 2.6% to 1.3% to factor in the replacement of GST with SST, as well as the freeze in RON95 and diesel fuel prices.
  • The subdued CPI and GDP growth outlook may encourage BNM to tolerate risk of inflation overshooting by keeping its monetary policy neutral for an extended period.
  • We reiterate our forecast for the Overnight Policy Rate (OPR) to remain at 3.25% for the remainder of 2018F, with the next interest rate hike seen in 2H19F at earliest.

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CPI inflation accelerated during the election month
Headline inflation nudged up to 1.8% yoy in May (CIMB: +2.0% yoy, Bloomberg consensus: +1.8% yoy, April: +1.4% yoy), due to a low base in fuel inflation. In comparison, core inflation was unchanged at +1.5% yoy in May. On a seasonally adjusted basis, headline CPI increased 0.2% mom in May (unchanged mom in April). Effective 1 Jun 2018, the GST will be reduced from 6% to 0%, although businesses were already offering discounts since May.

Higher transport inflation due to low base
Transport inflation surged to +3.8% yoy in May (+0.4% yoy in April), as declining global oil prices a year ago resulted in lower retail fuel prices and air fares. Airlines deployed more flights in May to cater for increased demand driven by the election, but air fares only rose 0.1% mom as airlines waived flight change fees and extended fixed price promotions. The Ministry of Finance revealed on 31 May that the retail prices for RON95 petrol and diesel will be fixed at RM2.20/litre and RM2.18/litre, respectively, for an indefinite period. Effective 7 Jun, RON97 petrol retail price is set based on market prices reviewed on a weekly basis every Thursday, based on the existing Automatic Price Mechanism. Since 7 Jun, RON97 prices have risen by 5.3% from RM2.47/litre to RM2.60/litre currently.

Benign food inflation during Ramadan month
Food price pressures were fairly subdued during the Ramadan month of May (+2.2% yoy vs. + 2.6% yoy in April), due to smaller price gains for food at home (+1.3% yoy vs. +1.9% yoy in April). The month of May also saw softer price gains for household equipment and maintenance (+1.5% yoy in May vs. +1.8% yoy in April), as well as quarterly housing rental adjustment (+0.7% mom in May vs. no change in March-April).

Subdued inflation outlook to delay monetary policy normalisation
To account for downward consumer price adjustments resulting from the GST cut, the reintroduction of the Sales and Service Tax (SST) in Sep, and curbed spillover effect from global oil prices to retail RON95 petrol and diesel prices, we are revising down our 2018F headline inflation forecast from 2.6% to 1.3%, which is well below Bank Negara Malaysia’s (BNM) policy target of 2-3%. Subdued price trends and a weaker GDP growth trajectory, arising from truncation of public consumption and investments, may encourage BNM to tolerate risk of inflation overshooting by keeping its monetary policy neutral for an extended period. We reiterate our forecast for the Overnight Policy Rate (OPR) to remain at 3.25% for the remainder of 2018F, and expect the next interest rate hike to be delayed to 2H19F.

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Originally published by CIMB Research and Economics on 20 June 2018.