Inflation up 3.7% in August, exceeding forecast of 3.5%


MALAYSIA’S headline inflation rate for the month of August 2017 rose to 3.7% year-on-year (YoY), exceeding an earlier forecast of 3.5%.

A research note by RHB Research Institute Sdn Bhd revealed that the rise is mostly due to a faster increase in transportation costs which rode on the higher fuel rates, as well as an obvious hike in food and beverage (F&B) prices.

RHB Research stated that the increased headline inflation in August was expected, as cost of transportation picked up to 11.7% during the month under review on higher retail fuel prices, compared to a 7.7% increase in July.

After a decline over four months, RON95 fuel bounced back to a growth of 8.2% month-on-month (MoM) in August.

This was in line with a recovery in international crude oil prices, but was balanced out by the stronger value of the ringgit for the month.

The cost of F&B rose higher to 4.3% for the month of August on the back of rising cost of food at home — mainly fish and seafood.

The research added that prices of meat, rice, flour and cereal also increased during that month, offset by the slower increase in prices of oil, fruits and vegetables.

After the removal of subsidies by the government in November 2016, the prices of oil and fats stayed relatively high, which caused a spike of 48.9% YoY from June till August.

While the cost of clothing and footwear decreased at a slower pace, the cost of housing, water, electricity and gas, and lifestyle luxuries such as hotels picked up in August by 2.4%.

These were balanced out by the slowdown in prices of recreation services and culture, growing at its slowest pace in more than two years due to a higher base after the cultural services increased 4.6% MoM in August 2016.

RHB Research also stated that the cost of healthcare (+2.6%) and miscellaneous goods and services (+1.3%) improved during the month, while cost of communication remained in a decline (-0.3%) for August, unchanging from the previous month.

The headline inflation rate had reached an eight-year high of 5.1% in March 2017, but has since subsided.

Meanwhile, the core inflation rate slowed to 2.4% YoY in August, from 2.6% in July and 2.5% in June, suggesting that the underlying inflation remains passive — with mellow demand pressure and more reasons for Bank Negara Malaysia (BNM) to maintain its monetary policy stance.

RHB Research noted that BNM is most likely to keep the Overnight Policy Rate (OPR) at 3% in 2017, due to the ease of inflation in the second half of the year while the ringgit stabilises.

Contrary to that, the research house said they presume the policy stance is likely to tilt towards an upside in 2018.

“We believe the central bank would likely increase OPR by 25 basis points to 3.25% next year, as major global central banks are stepping up talks to tighten monetary policies and with the Malaysian economy improving further,” the research house said.

BNM’s next and final monetary policy statement for the year will be on Nov 9, but for now the OPR is maintained at 3% at its latest meeting in September.

According to a previous report, BNM governor Tan Sri Muhammad Ibrahim said he is optimistic on this year’s economic outlook, from the 5.8% increase in domestic product growth driven by firmer domestic activity and exports.

Moving forward, RHB has said the headline inflation rate will ease to 2.8% YoY in the second quarter of 2017, due to lower fuel prices and a waning base effect.

However, for the whole year it is expected to pick up to 3.5%, from 2.1% in 2016, on the back of higher business cost, removal of subsidies on the prices of selected administered goods, higher fuel prices based on YoY and the weaker ringgit, which translates into higher import prices.