KUALA LUMPUR (Aug 23): Malaysia's headline inflation rate is projected to inch up to 1% in July, from 0.8% in June, underpinned by stronger inflationary pressure from the transport fuel component, said Ram Rating Services Bhd.

The rating agency also guided for a limited further upside pressure against inflation, as price increases are expected to remain subdued with the zero-rating of the goods and services tax (GST).

This is despite the incoming sales and services tax (SST) exerting some cost pass-through, which will show only a limited potential upside relative to the GST, its head of research Kristina Fong said in a statement today.

"The average price of RON95 petrol ascended 12.4% in July (June: 9.9%) amid low-base effects. Prices had averaged RM1.96/litre in July 2017 compared to RM2.00/litre in June 2017, against the currently subsidised level of RM2.20/litre.

"Our initial assessment of the SST and its potential inflationary impact does not indicate any destabilisation of prices or consumption for now. This is due to the SST's smaller share of products in the Consumer Price Index (CPI) basket and because it applies to manufacturers rather than end-consumers directly," Fong explained.

Furthermore, she said, any destabilising effects from the SST should be contained by its single layer of taxation, the less restrictive administrative costs of implementation and proposed exemptions on raw materials, components and packaging for registered manufacturers.

For the full year, RAM expects inflation to average 1.3%, versus its earlier projection of 1.5%.

Fong said the revised projection takes into account the deflationary pressure from the change in the taxation system, lower fuel prices from the reinstatement of fuel subsidies and a persistently weak growth trajectory for food prices.

"Given the lower core inflation and moderating GDP growth (4.9%), there seems to be a downward bias for the overnight policy rate (OPR) this year.

"Nonetheless, our base case remains — the OPR is expected to stay put at 3.25% through the rest of 2018 as lingering policy uncertainties and some macro risks may still pose a risk to capital outflows," Fong added.

The CPI, measuring inflation, will be released by the Department of Statistics tomorrow.