Malaysia: January CPI decline narrows, signals return of inflation

CPI Declines Narrow In January Amid Higher Fuel And Food Prices

Malaysia’s headline CPI fell at a slower pace of 0.2% y/y in January (from -1.4% y/y in December 2020), coming in lower than our estimate (-1.0%) and Bloomberg consensus (-0.8%). On a m/m basis, CPI posted the strongest gain since February 2017 by 1.2% (December, +0.5% m/m).

The lower CPI decline was mainly due to higher fuel prices, a persistent uptick in selected food items, as well as the effects of lower electricity bill discounts and rebates that started in January. Other factors that weighed on CPI, include continued sales tax exemptions for passenger vehicles and the reinstatement of Movement Control Order (MCO 2.0) in mid-January.

Transport price declines tapered to the lowest rate in 13 months at 5.1% y/y (December, -8.4% y/y) as fuel prices continued to track higher global oil prices. A moderate recovery in airfares, an extension of sales tax exemptions for passenger vehicles, as well as inter-district and interstate travel ban during MCO 2.0 were among other factors that weighed on transport price deflation last month.

Food & non-alcoholic beverages prices inched up to 1.5% y/y (December, +1.4% y/y) amid higher cost of selected food items such as milk powder & other dairy products (+2.1% y/y in January, unchanged in December), eggs (+2.3% y/y in January, -1.5% y/y in December), and vegetables (+4.4% y/y in January, +3.6% y/y in December).

Thus, the food at home edged up for the second straight month to 1.5% y/y (from +1.3% y/y in December and +1.2% y/y in November) while food away from home held at 1.6% y/y.

Housing, utilities and other fuel prices fell by a marginal 0.7% y/y (December, -3.3% y/y) after the government re-introduced lower electricity bill discounts and rebates from January to support households and businesses through the pandemic. The electricity price index recorded a smaller contraction of 10.2% y/y (December, -33.3% y/y), while the housing rental index maintained its steady growth of 0.6%.

By grouping, food price index rose 1.6% y/y (December, +1.4% y/y) while non-food price index fell 1.1% y/y (December, -2.7% y/y). Price gains of durable goods moderated further to 1.9% y/y (from +2.3% y/y in December) while semi- and non-durable goods continued to post price declines albeit narrower at 0.2% y/y and 2.0% y/y respectively (December -0.3% y/y and -5.0% y/y).

Core CPI rose at a steady pace below the 1.0% level for the fourth consecutive month at 0.7% y/y in January, while services inflation inched lower to 0.8% y/y (from +0.9% y/y in December). This suggests a lack of demand price pressures for now while the projected uptrend in headline inflation is mainly due to transitory factors (i.e. supply disruptions and higher global commodity prices).

Return To Positive CPI In 1Q21, BNM May Be Inclined To Hold Rates

January’s narrower decline in headline CPI further affirms our view of a return to positive CPI in 1Q21, or as early as in February’s reading. The uptrend in headline CPI this year will be driven by projected economic recovery amid the roll-out of vaccines that starts today (24 February), higher global commodity prices, and year-ago low base effects.

PM Tan Sri Muhyiddin Yassin and several front-liners including Health Director-General Tan Sri Dr. Noor Hisham Abdullah are the first group of candidates to get their jabs today (February 24) under the National COVID-19 Immunisation Program that will be implemented in three phases over 12 months until February 2022.

Commodity prices are likely to edge higher on the back of improving demand in tandem with the economic recovery, ongoing stimulus support, supply disruptions, vaccine rollouts and pandemic containment that improves sentiment.

Nevertheless, upside risks to inflation are tempered by the extension of sales tax exemption for passenger vehicles until the end-June 2021, the reintroduction of electricity bill discounts and rebates for users up to six months, price cap on petrol RON95 and diesel, and higher unemployment.

The government has (on February 10) announced a price ceiling on petrol RON95 and diesel at RM2.05 and RM2.15 per litre respectively, following the rise of global oil prices. We are likely to tweak our 2021 full-year inflation target of +2.1% higher amid signs of a further rise in global oil prices (official forecast: +2.5%, 2020: -1.1%).

We expect Bank Negara Malaysia (BNM) to keep the Overnight Policy Rate (OPR) unchanged at 1.75% at the coming monetary policy meeting on March 4. Despite weakness in GDP and extension of MCO 2.0, we think BNM is less inclined to use broad and blunt monetary policy tools at this stage.

BNM has kept its key policy rate on hold since September 2020. We think that BNM may be more inclined towards targeted measures to support an uneven recovery such as upsizing the support funds for SMEs and hard-hit segments. Meanwhile, economic sentiment should improve as the government has allowed most economic sectors to reopen while the vaccine program kicks-off yesterday.