Malaysia’s headline inflation moderates further

The uncertainties surrounding the Russia-Ukraine conflict and sanctions remain key upside risks to inflation 


UOB Global Economics and Markets Research expects Malaysia’s Consumer Price Index (CPI) will ratchet up over the next few months with signs of domestic inflation pressures building up from surging costs and improved demand as the economy reopens. 

The uncertainties surrounding the Russia-Ukraine conflict and sanctions remain key upside risks to inflation. 

Headline inflation decelerated further to 2.2% year-on-year (YoY) in February 2022, marking the slowest price increases in six months. 

“Domestically, the ongoing post-pandemic labour shortages, increase in the national minimum wage and review of the government’s fuel subsidy mechanism infer potential second-round effects,” they said. 

They believe the various ongoing government subsidies and cash aids alongside the soon-to-be-implemented festive season maximum price control scheme will likely help to cushion the rising costs of living. 

“Hence, we maintain our 2022 full-year inflation forecast at 3% for now (from 2.5% in 2021),” they added. 

UOB noted that Malaysia’s headline inflation in February has defied its estimation at 2.5% and Bloomberg consensus at 2.4% for an uptick. 

“The smaller inflation rate in February was chiefly credited to the government’s fuel subsidies that helped to contain the effects of elevated global oil prices on transport costs,” UOB’s economists Julia Goh and Loke Siew Ting wrote in a report last Friday. 

According to the economists, the Covid-19 Omicron wave which started in early February has further weighed on passenger transport services by air during the month. 

“This fully offset a broad-based gain across other CPI components last month,” they noted. 

Meanwhile, MIDF Research stated that the deceleration in the CPI in February was attributable to the slower non-food inflation at 1.5% YoY, in contrast to further rise in food inflation to four-year high of 3.7% YoY. 

The core consumer prices accelerated by 1.8% YoY, which saw the fastest increase in 2.5 years. 

“The upward trend in core CPI indicates the underlying price pressures from growing domestic demand, underpinned by improving labour market conditions and further reopening the economy,” it stated in a report last Friday. 

On a month-on-month basis, CPI rose at 0.2% with faster inflation in housing and utility, health, restaurants and hotels. 

The Producer Price Index (PPI) eased for the third straight month in January as the factory-gate inflation eased to 9.2% YoY. 

MIDF noted that this was the slowest PPI inflation since March last year following improvements in the supply condition.

“Among the components, the lower drag in the PPI was underpinned by the slower inflation in the mining and manufacturing sectors. 

“Gauging on the trend in the PPI, we anticipate the CPI to follow a similar path in the coming months amid the slower inflationary pressure from the cost-push inflation,” it said. 

Global supply improvement showed a decline as the Global Supply Chain Pressure Index fell to a seven-month low. 

The Baltic Dry Index increased in February but remained below the levels registered in March to December last year. 

“However, high commodity prices following intensified geopolitical tension and the ongoing war in Ukraine and possibility of prolonged supply chain disruption may keep inflationary pressures high,” it stated. 

MIDF maintained its forecast for 2022 headline inflation at 2.1%. 

“While the source of inflation will come from rising food prices and growing demand, we opine the normalisation of supply in the later part of the year (2H22) and the price control imposed on retail fuel and selected food items will limit the upward pressure on the overall CPI inflation,” it added. 

MIDF foresees Bank Negara Malaysia increasing the Overnight Policy Rate by 25 basis points to 2% in 2H22 on the back of sustained economic growth.