RAM Ratings sees higher inflation of 1.6% in March

PETALING JAYA: RAM Ratings expects the headline inflation rate to marginally increase to 1.6% in March, after it dropped to 1.4% in February, the lowest since October 2016.

The rating agency said the slight acceleration in inflation for March is primarily attributable to an anticipated recovery in food inflation, which temporarily dipped to 3% in February from 3.8% in January.

However, it noted that some of this upward pressure will be offset by a negative growth contribution from transport fuel amid lower retail fuel prices which fell 4.4% year-on-year.

“Given that the high-base effect is expected to continue to moderate the contribution from the transport component, headline inflation is envisaged to ease to 2.5% in 2018 after charting 3.7% in 2017.

The Department of Statistics is set to announce March inflation on Wednesday.

Meanwhile, RAM Ratings said the producer price index (PPI), a forward-looking indicator of consumer price index (CPI) inflation, declined 1.2% and 3.4% in January and February, respectively.

“This seems to signal that the pass-through of costs from businesses to consumers may be limited and, hence, less likely to be a source of consumer inflationary pressure,” said its head of research Kristina Fong.

RAM Ratings highlighted that the strengthening ringgit this year will help contain any risks of imported inflation, but cautioned that there may be some risk of marginal demand-pull inflation in the second half of the year as an impending review and potential revision of the minimum wage.

Given the expectations of more moderate GDP growth and inflation of 5.2% and 2.5%, respectively, in 2018, the research house does not envisage further hikes in the Overnight Policy Rate (OPR) this year.

“Despite our base-case assumption, Bank Negara Malaysia’s future actions are expected to be data-dependent. Another rate hike may be warranted if GDP growth surprises on the upside and inflationary risk heightens, especially that stemming from core inflation.”