• Inflation Edged Down to 1.8%, a Tad Lower Than Market Estimates of 1.9%
   
• Softer inflation was driven by slower increases in key groups, including miscellaneous goods & services and others

• Core inflation moderated to 1.8%, marking the softest growth in six months

• Malaysia's PPI eased to 0.3% in August 2024, with all sectors posting gains except for mining

• We keep our 2024 inflation forecast at 2.0% due to muted inflation from diesel SRI

OVERVIEW

Malaysia’s Consumer Price Index (CPI) moderated to 1.8% in September 2024, compared to market estimates of a steady rate at 1.9%. Compared to the previous month, the CPI rose 0.1%, the same rate as in August. Year-to-date as of September, inflation averaged 1.8% (Jan-Sep 2023: +2.8%). Core inflation also cooled down to 1.8%, the lowest since April 2024. YTD core inflation stood at 1.8% (Jan-Sep 2023: +3.3%).

Urban CPI outpaced the rural CPI, rose by 1.9% YoY in September 2024 spurred by Personal Care group (Sep urban: +3.3%; rural: 2.9%); Restaurants category (Sep urban: +3.2%; rural: 3.2%); Utilities category (Sep urban: + 3.2%; rural: + 3.3%) and Recreation, Sport & Culture (2.3%). CPI for the income group below RM3,000 grew by 1.6%, down from 1.7% in August, driven by increases in the Restaurants category (+4.1%), Personal group (+3.1%), and Utilities (+2.9%).

Analysing the CPI sub-components (refer to Table 4), the moderation in September 2024 inflation was primarily driven by a slower rise in key categories, including alcoholic beverages (Sep: 0.8% vs. Aug: 1.1%), furnishings and household maintenance (0.6% vs. 0.7%), transport (1.1% vs. 1.3%), communication (0.4% vs. 0.5%), and miscellaneous goods & services (3.1% vs. 3.2%). Additionally, clothing prices fell further to -0.3% (Aug: -0.2%). Conversely, inflation remained stable for food (1.6%), utilities (3.1%), health (1.6%), education (1.5%), and restaurants (3.2%), while recreation costs rose slightly to 2.1% (Aug: 2.0%) driven by a 4.0% increase in recreational services. Food inflation remained unchanged at a three-year low of 1.6% in September 2024, the same rate as recorded since July 2024 – with 144 out of 247 food items (58.3%) seeing price hikes compared to September 2023. The Food at Home subgroup increased by 0.4% (Aug: 0.3%), primarily driven by a 0.7% rise in the expenditure class of Meat, which had previously recorded a decrease of 0.7% in August. Food away from home increased at a slower pace of 2.8% compared to 3.1% in the previous month.

Compared to regional countries, Malaysia’s CPI is lower than inflation in the Philippines. Eurozone inflation dropped to 1.7% in September 2024, (Aug: 2.2%), driven by a decrease in energy prices to -6.1% and slower services inflation at 3.9%. The U.S. inflation rate slowed to 2.4% in September (Aug: 2.5%), primarily due to shelter inflation at 4.9% (Aug: 5.2%) and a decline in energy inflation to -6.8% (Aug: -4.0%). Additionally, South Korea's inflation rate decreased to 1.6% in September, down from 2.0% in August, spurred by a slower rise in utilities group to 1.8%. Indonesia's inflation rate rose at a slower pace of 1.8% in September (Aug: 2.1%), mainly due to slower food inflation at 2.6% and transport inflation at 0.9%. The Philippines slowed to 1.9% in September (Aug: 3.3%), essentially due to slower growth in alcoholic beverages and tobacco (3.1%), clothing and footwear (2.9%), and restaurant and accommodation services (4.1%). Moreover, Thailand's inflation increased to 0.6% in September, chiefly attributed to food inflation rising to 2.3%, while non-food products continued to decline at -0.6%. Conversely, China's inflation was 0.4%, down from 0.6% in August, with food inflation rising to 3.3% while health inflation slowed to 1.2%.

Malaysia's Producer Price Index (PPI), which measures the prices of goods at the factory gate, softened to 0.3% in August 2024 (Jul: 1.3%), marking its lowest level since February 2024. In August 2024, the PPI Local Production rose across most sectors except Mining. Agriculture grew 2.7% (Jul: 3.4%), with perennial crops up 6.3%. Manufacturing increased 1.0% (Jul: 0.9%), led by computer, electronic & optical products (5.8%) and food products (2.3%). Water supply rose 8.0%, and Electricity & gas supply gained 1.0%. Conversely, the Mining sector dropped 8.3%, driven by declines in natural gas (-10.1%) and crude petroleum (-7.8%).

On a monthly basis, the PPI dropped 0.9% in August 2024 (Jul: -0.2%), led by a 6.8% decline in Mining. Agriculture fell 2.7%, and Manufacturing edged down 0.2%. Water supply decreased 0.8%, meanwhile Electricity & gas supply rose 0.6%.

OUTLOOK

Malaysia's inflation eased to 1.8% YoY in September 2024, slightly below market expectations, driven by stable prices for essential food items and utilities, as well as a drop in transport costs. Demand pressures remained subdued, with core CPI also easing to 1.8% YoY, marking the lowest rise in six months. The easing inflation signals the inflationary effects from policy changes - SST rate hike to 8%, higher utility tariffs and targeted diesel subsidy – remained under control and has been aided by government measures.

Malaysia's inflation is projected to average around 2.0% in 2024, supported by stable price levels and strong domestic growth, with minimal impact from diesel subsidy adjustments. Meanwhile, as announced in the Budget, RON95 fuel subsidies will be kept for 85% of the population when the next phase of fuel subsidy rationalization starts in mid-2025, therefore the direct inflation impact would be seen as minimal. However, rising global commodity prices due to geopolitical tensions, particularly in the Middle East, present potential risks. For 2025, the inflation target aligns with the Ministry of Finance's projection range of 2% to 3.5%, reflecting the effects of RON95 subsidy rationalisation and the expansion of the Sales and Service Tax (SST). How exactly pump prices will be set remains uncertain, and managing this transition effectively will be crucial for securing public support and smooth implementation. Despite these factors, Bank Negara Malaysia is expected to keep the overnight policy rate at 3.00% throughout 2024 and 2025, maintaining a stable inflation outlook.

Source: BIMB Securities Research - 25 Oct 2024