This article first appeared in The Edge Financial Daily on January 25, 2018

KUALA LUMPUR: Malaysia’s inflation rose 3.5% year-on-year (y-o-y) in December 2017, higher than the 3.4% y-o-y rise in November, due to higher transport and food and non-alcoholic beverage prices, official data showed yesterday.

The latest reading of the consumer price index (CPI) came in right in line with market expectations.

According to the department of statistics Malaysia, the index of transport group showed a significant increase of 11.5% y-o-y in December 2017, after rising 10.8% y-o-y in November. The average price of one litre of RON95 petrol was RM2.27 in December 2017 from RM1.90 a year ago, while that of RON97 rose to RM2.55 from RM2.25.

The index for food and non-alcoholic beverages, which accounted for 30.2% in the CPI weights, increased 4.1% y-o-y in December 2017, on higher prices of fish and seafood, meat, fruits and vegetables.

For full-year 2017, the CPI saw a rise of 3.7% y-o-y, up from 2.1% y-o-y in 2016, led by increases in food and non-alcoholic beverages (+4%).

Other major groups which contributed to the rise in CPI were transport (+13.2%), health (+2.5%), restaurants and hotels (+2.5%), housing, water, electricity, gas and other fuels (+2.2%), and furnishings, household equipment and routine household maintenance (+2.1%).

Nomura Global Markets Research said the 3.7% inflation figure for 2017 is near the top-end of Bank Negara Malaysia’s (BNM) 3% to 4% forecast range.

“We expect inflation to decline to 2.7% in the first quarter of 2018 because of base effects from the substantial fuel price hikes last year before reversing in the second quarter and averaging 3.2% for the full year,” it said in a note to clients yesterday.

The research firm continues to expect BNM to raise its policy rate by 25 basis points (bps) at its Monetary Policy Committee (MPC) meeting today to 3.25%.

“We believe [the hike] would be intended more to reduce the pace of policy accommodation and prevent a build-up of financial imbalance risks. However, we think BNM will likely pause from there given the elections — which we expect to be called sometime in late April to early May — and the need for the government to run tight fiscal policy in the second half of 2018 to meet its full-year deficit target. Relatively stable core inflation also suggests there is little need for a more aggressive rate hiking cycle,” said Nomura.

UOB Global Economics and Markets Research senior economist Julia Goh expects lower inflation this year amid high base effects.

“We project headline inflation of 2.5% in 2018,” she said in a note to clients.

Goh pointed out that the ringgit is now the strongest performing Asia currency year-to-date, gaining 8% against the US dollar to 3.91 since the previous MPC meeting on Nov 9, 2017. This is largely on the back of higher oil prices, a broadly weaker US dollar, and anticipated rate hikes by BNM.

“Even at current ringgit levels, we think the local currency continues to lag its regional counterparts, which affirms the ringgit remains undervalued with breadth to strengthen further. We continue to see scope for further gradual ringgit gains amid pronounced US dollar weakness, stronger crude oil prices and robust macro conditions,” she added. The ringgit rose 0.39% to close at 3.9115 against the US dollar yesterday.