Malaysia: Inflation rate to hover between 3% and 3.5%

PETALING JAYA: Analysts have mixed views on the inflation outlook for Malaysia in the near term but expect it to hover between 3% and 3.5% for the year underpinned by slower economic growth and stable commodity prices.

In March, the consumer price index (CPI) moderated to 3.4% year-on-year (y-o-y) from 3.7% y-o-y in February this year.

Core CPI increased by 3.8% y-o-y in March, but was 0.1% lower from February’s 3.9%.

PublicInvest Research said the CPI’s growth rate in March was below market expectations of 3.6%, which stemmed from the moderate rise in food inflation to 6.9% y-o-y in March from 7% y-o-y in February.

“In the midst of a climate of heightened economic uncertainty, the government’s recent launch of the Rahmah Menu initiative on Jan 31 has emerged as a critical step towards mitigating the escalating costs of living,” the research house said in a report recently.

PublicInvest also noted there was a jump in electricity tariffs across industrial and commercial sectors from the implementation of the Imbalance Cost Pass-Through mechanism in Peninsular Malaysia. Nevertheless, the rate of increase for restaurant and hotel costs saw an uptick of 7.2% y-o-y from 7.4% in February.

“We believe that a potential announcement on electricity tariff revisions is anticipated in the second half of 2023 (2H23),” said the research house.

According to PublicInvest Research, the deceleration of inflation growth in the transportation sector is in line with the decrease in Brent crude oil pricing.

“The price of Brent crude oil registered a substantial 32.1% downturn to reach US$78.50 (RM349) per barrel in March.

“A corresponding y-o-y decline of 10.2% was observed in the average price of RON97, settling at RM3.35 per litre in March,” the research house said.

Going forward, PublicInvest Research anticipates the headline inflation to be between 3% and 3.5% this year.

However, it also cautioned against any amendments to retail oil price caps or the implementation of price control measures to affect its projection.

In the near term, high inflationary pressures is expected to remain persistent with a slower growth rate in 1H23.

“The budget allocation for subsidies this year stands at RM58.6bil, representing a reduction from the RM67.4bil allocated in 2022, which we attribute to a decline in commodity prices and the potential shift towards a more targeted subsidy scheme later in the year.

“Additionally, we estimate that eliminating fuel subsidies for the Top 20 income group (which accounted for 35% of all fuel subsidies in 2022) would increase inflation by an additional 0.45 to 0.75 percentage points annually,” the research house said.

Hong Leong Investment Bank Research also concurred that the headline inflation would remain on the upside this year underpinned by the strengthening of domestic demand.

It maintained its CPI forecast at 3.1% for 2023.

“Risks to the inflation outlook also remain titled to the upside, stemming from volatile global commodity prices and potential changes in government policy on subsidies and price controls,” the research house said.

Meanwhile, CGS-CIMB Research expects the price control scheme for Hari Raya Aidilfitri (until April 30) which is in tandem with the Payung Rahmah initiative to keep CPI contained in April this year. The research house projects CPI to drop below 3% y-o-y by mid 2023.

“In a bid to overcome shortages, the government intends to float the prices of chicken and eggs in June. This could add to price pressure on fresh food.

“With the government’s intention to lower its subsidy burden, the electricity tariff could be revised upwards for the domestic (residential) high-volume users in July.

“We estimate that an adjustment to electricity tariff could raise CPI by about 20 to 60 basis points in 2023,” the research house said.

TA Research, which forecast inflation rate at about 3.5% y-o-y in April and headline inflation at 3%, said the inflation outlook is also susceptible to fluctuations in the ringgit and extended supply chain disruptions.

“This forecast (3.5%) is primarily premised on our expectations of reduced transportation costs.

“Nevertheless, we remain cautious regarding the performance of food-related expenditures, as they may experience a slight upsurge in demand during the festive season.

“The headline inflation is anticipated to remain manageable in 2023,” the research house said.