Inflation to tick up this year, remain muted in short term

27 May 2019 / 21:18 H.

PETALING JAYA: Economists are expecting an uptick in inflation this year, from 1% in 2018, owing to a low base effect in view of the three-month tax holiday in 2018 as well as a weaker ringgit against the US dollar.

“However, we believe underlying inflation could stay fairly muted in the near term underpinned by softening domestic sentiments, added with volatile global crude oil prices,” AmInvestment Bank said in a report.

It maintained its full-year inflation target at 1.0%, and believes that Bank Negara Malaysia will keep interest rates unchanged after instituting a cut early this month.

In April, headline inflation came in at 0.2% year-on-year (y-o-y), unchanged from March, but missed market expectations of 0.4%. However, inflationary pressure remained in the negative region when averaged for the first four months at -0.2%. Likewise, core inflation in April increased at almost the same pace as it did in March, at 0.5% y-o-y.

“Looking at the subsectors, price pressure in the economy was seen rather lacklustre almost across the board,” said AnInvestment Bank.

It said both cost of food and non-alcoholic beverages and utilities rose 1.1% and 2.0% y-o-y respectively in April, the same as in March. The drag in inflation was partly driven by a further decline in the clothing and footwear subsector at 3.2% y-o-y versus a decline of 3.0% y-o-y.

Though the decline in cost of transport was smaller – in April at 2.6% y-o-y from a 3.0% y-o-y drop in March – fuel pump prices of both RON95 and diesel were lower on an annual basis.

RON95 prices recorded a decline of 5.5% y-o-y in April (RM2.08/litre) from a drop of 5.4% y-o-y in March while diesel prices recorded zero per cent year-on-year growth (RM2.18/litre) compared with a 0.3% year-on-year growth in March.

However, RON97 prices accelerated 9.5% year-on-year in April (RM2.71/litre) from 1.9% y-o-y in March (RM2.51/litre).

PublicInvest Research said there is a fair chance that the Consumer Price Index (CPI) may rebound in the near term, driven by a combination of factors, including the increase in electricity tariff for businesses, which is expected to be passed on to consumers.

The higher minimum wage (+4.7%; RM1,100 a month) along with protracted weakness of the ringgit may also support the rebound in the CPI.

“However, we also think that the CPI may get more lift from global conditions especially the outcome of US-China trade negotiations. A favourable outcome may spark a rally not only in commodity but also other asset classes, a preamble of wealth creation and spending activities,” it said.

“On the flip side, however, a breakdown or prolonged negotiation may put a lid on the rise in inflation, conditions which we are facing at the moment,” it added.

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