This article first appeared in The Edge Financial Daily on June 21, 2018
KUALA LUMPUR: Costlier fuel, food and non-alcoholic beverages nudged inflation up to 1.8% in May from a year earlier, but the rate is expected to ease from June owing to the zero-rated goods and services tax (GST).
The rate was higher than April’s 1.4% year-on-year (y-o-y) increase; on a monthly basis, inflation as measured by the Consumer Price Index (CPI), increased 0.2% after staying flat in April.
In a client note, Nomura observed that the official measure of core inflation was stable at 1.5% in May, unchanged from April.
MIDF Research noted this was the highest reading since February 2018 due to a strong recovery in transportation prices although inflation moderated for a number of major groups. “Transportation inflation rose 3.8% y-o-y in May compared with the 0.4% registered a month earlier,” it said in a report.
In May, the average price of brent crude oil rose 49.2% y-o-y to US$76.70 (RM307.57) per barrel and prices have been trending upwards since February due to strong global demand and supply concerns owing to Opec production curbs. Chaos in Venezuela and US President Donald Trump’s decision to pull out of the Iran nuclear deal have added to the uncertainties.
Other segments that registered an increase were housing, water, electricity, gas and other fuels (2.1%), restaurants and hotels (2.1%), health (1.9%) and furnishings, household appliances and maintenance (1.5%).
The inflation rate was in line with Bloomberg’s and Reuters’ consensus forecast of 1.8%. “This came in line with market consensus but a tad higher than our estimate of 1.6%,” said UOB Group senior economist Julia Goh in a note yesterday. However, it was marginally below the 1.9% forecast by RAM Ratings Services Bhd.
Goh said with the zero-rating of GST from June, preliminary projections suggest inflation could ease below 1% in August to September, with the extent of the moderation depending on the impact of the sales and services tax (SST) to be reinstated in September. Other factors include the breadth of goods and services that will incur the SST, and the extent of savings from the tax changes passed on to consumers.
Nomura expects the headline CPI to fall in June owing to the zero-rated GST as well as the return of fuel subsidies.
Except for Penang, the May inflation rate across all states increased partly due to preparations for Ramadan and Hari Raya Aidilfitri. Kuala Lumpur, Selangor and Johor posted rates above the national level, charting 2.2%, 2.1% and 2% respectively.
Nomura and UOB have forecast full-year CPI at 1% to 2%, below Bank Negara Malaysia’s (BNM) 2% to 3% forecast.
As inflationary pressures remain steady, MIDF anticipates BNM will maintain its current monetary policy with no more hikes to the overnight policy rate for the rest of 2018.
“With GDP growth also likely to slow to 5.1% in 2018 from 5.9% in 2017, below BNM’s 5.5% to 6% forecast, this supports our call of no change to the 3.25% policy rate for the rest of this year,” said Nomura.
However, economist Vincent Loo Yeong Hong of RHB Research Institute believes another round of rate hike is still on the cards this year (+25 basis points to 3.5%), in line with the US Federal Reserve raising its policy rate at a quicker pace than previously expected.