Average inflation rate for 2023 projected at 2.8% as headline inflation to continue downtrend


UOB Global Economics & Markets Research expects an average inflation rate of 2.8% for the entire year of 2023 after headline inflation for the country eased to a six-month low of 3.8% in December 2022.

“In the absence of domestic policy changes for price-administered items, particularly fuels and utilities, we expect headline inflation to continue its downward trend towards year-end.

“This will result in an average inflation rate of 2.8% for the entire year of 2023 (Ministry of Finance [MoF] estimate: 2.8%-3.3%),” said the research house.

It noted that measures by the newly-formed unity government to maintain electricity tariffs for households and small businesses until the end of June 2023, as well as continuing price control policy and chicken subsidies until a policy relating to the targeted mechanism is finalised and giving temporary permit for importing eggs to deal with the issue of chicken egg supply shortage will help ease inflation pressures.

“All these measures will somewhat help to contain inflation pressures in the short term, while the government is still fine-tuning its targeted subsidy mechanism (including fuel subsidy) which is reported to be unveiled in a matter of months,” it said.

“Under a potential scenario of gradual fuel price hikes every quarter based on global crude oil price assumptions of US$80-US$90 (RM394.20) per barrel, it (the direct impact) could lift headline inflation to 4% in 2023.

“In another scenario of assuming that fuel prices are unchanged in the first half of 2023 (1H23) and then gradually raised in 2H23, headline inflation could be capped at 3.5%,” it explained.

Hence, UOB said, volatile global commodity and non-commodity prices, domestic policy changes, the persistence of post-pandemic demand and currency movement are key wildcards for its 2023 inflation outlook (baseline estimate: 2.8%).

On the monetary policy front, it said Bank Negara Malaysia (BNM) unexpectedly took a prudent pause on its interest rate hike on Jan 19 in order to assess the impact of the cumulative past interest rate adjustments, given the lag effects of monetary policy on the economy.

It said that the central bank guided that it is not done with the interest rate hikes yet and future rate moves remain data dependent. However, UOB said, recent global developments and country-specific factors suggest rising challenges for BNM to hike further in the near term. 

“Hence, we have dialled down our expectation to just one more 25 basis points (bps) hike to bring the Overnight Policy Rate (OPR) back to pre-pandemic level of 3% by mid-2023, before taking a long pause for the rest of the year. The next monetary policy meeting is scheduled on March 8-9, which is about two weeks after the re-tabling of Budget 2023 on Feb 24,” it said.

Malaysia’s headline inflation eased to a six-month low of 3.8% year-on-year (YoY) in December in line with UOB’s and Bloomberg estimates of 3.8% and 3.9%, respectively.

“This brought the full-year inflation rate to an average of 3.3% (2021: 2.5%), coming in a tad lower than our estimate (3.5%) but matching the official forecast (3.3%),” UOB said.

On a month-on-month basis, Consumer Price Index (CPI) rose 0.2%, with five out of 12 components recording a negative monthly gain in December.

December’s annual inflation was primarily pulled down by lower prices for food and non-alcoholic beverages; transport; recreation services and culture; and miscellaneous goods and services particularly personal care amid year ago high base effects.

This helped to offset the persistent rise in restaurants and hotels price inflation and an uptick in housing, utilities and other fuel price inflation, which were the only two CPI components witnessing an increase in prices during the month.

With that, food price inflation as a whole dipped to a six-month low of 6.8%, while the overall non-food price inflation eased to 2.3%.

Besides that, there were fewer items recording a price hike compared to the preceding month, with 41 products showing a price increase of more than 10%, 78 items posted a price decline and 43 items recorded stable prices.

On another positive note, core inflation decelerated for the first time in 15 months to 4.1% YoY in December, tentatively suggesting that it has peaked at 4.2% in November.

Nevertheless, December’s core inflation continued to stay above the headline inflation for the third month in a row and surpassed its 2016-2021 long-term average level of 1.4% for the 12th straight month.

For the full year of 2022, core inflation averaged 3% (compared to 0.7% in 2021), hitting the upper bound of BNM’s forecast range of 2%-3%.

Meanwhile, services inflation maintained at 4.4% last month, the highest level since October 2008. It also exceeded its 2016-2021 long-term average of 1.9% for the eighth consecutive month. All these continue to presage strong demand price pressures, UOB said.