Malaysian headline inflation turns negative in January, inflation outlook benign in H1 2019

Malaysian headline inflation came in negative in January, the first negative print since November 2009. On a year-on-year basis, the consumer price inflation fell by 0.7 percent, whereas it dropped 0.5 percent sequentially. On a year-on-year basis, core rate decelerated to 0.2 percent after averaging 0.5 percent for the prior three months. While core inflation decelerates above its recent low of -0.2 percent year-on-year in August 2018, the recent deceleration underpins the view that underlying pressures continue to be benign.

Housing and utilities added 0.49 percentage point to annual inflation in January, greatly because of a low base effect. The food and beverages component also added to the headline figure, although the scale of the contribution has fallen since the removal of the Goods and Services Tax in June 2018.

Nevertheless, ‘transport’ costs more than countered the above contributions. This was partially because of a high base effect. However, more significantly was the government’s move to a weekly-managed float for petrol products in an attempt to pass on the benefit of lower crude prices to consumers. As average pump prices were below by about 10 percent sequentially in January, the transport component dragged overall inflation below 1.13 percentage point.

If global oil prices continue to be at current levels, the removal of the blanket petrol subsidy in the second quarter of 2019 would have only a modest effect on inflation, noted ANZ in a research report. Nevertheless, low base effects are likely to prop up annual inflation from June 2019.

“Looking past the monthly numbers, we continue to see a benign outlook for inflation in H1 2019, after which, a low base effect will come into play. Along with more moderate economic activity in Malaysia, we expect BNM to keep the OPR unchanged at 3.25 percent through 2019”, added ANZ.