Malaysia’s Inflation Outlook More Clearer In 2023 With PH: MIDF

Malaysia’s headline inflation continued on moderating trend, recording +4%yoy in October, however it was slightly higher than the market consensus of +3.9%. Non-food inflation edged lower to +2.4%yoy while food inflation rose to almost a record high seen in August. Apart from cost-push factors, the continued strengthening of domestic demand contributed to a new peak point for the core inflation rate at +4.1%yoy for the month.

On a sequential month basis, core prices still recorded growth of +0.1%mom. With this upbeat momentum, MIDF believes BNM is very likely to raise the OPR by another +25bps in the first MPC meeting for next year, in January next year. Looking at the fuel price growth, prices descended to a 20-month low at +3.4%yoy and contracted by -0.5%mom, recording four-straight months of month-on-month decline. This was in tandem with normalisation of commodity prices.

The newly formed coalition government is likely to keep the current fuel subsidy mechanism status quo till December. Hence, we could foresee fuel inflation to stay on deceleration and drag on overall inflationary pressure. On the other hand, the non-fuel inflation rate hit a new record high at +7.8%yoy among others attributed to the weakening Ringgit.

Global food inflation as reported by FAO of UN recorded at +2%yoy, the slowest since Sep-20. Among the components, global inflation of oils and sugar recorded contraction rates of -18.8%yoy and -8.5%yoy respectively. However, Malaysia’s food inflation edged up to +7.1%yoy, 0.1%pts lower than the record high. Price growth of Food at Home inched up to +5.8%yoy whereas Food Away from Home touched a new fresh high at +9.3%yoy. As a net-food importer, depreciation of MYR vs. USD by -11.4%yoy in Oct-22 (more than 5-year low) had partially caused the food inflation spike. Moving forward, the research house expects Malaysia’s domestic food inflation to decelerate at a moderate pace from this month onwards following the slight correction of global commodity prices particularly agriculture-related prices,s and improving the supply chain both regionally and domestically. In addition, MYR is on an appreciating path as the Fed is signaling a slower rate hike pace. With a new government formed post-GE15, MIDF is of the view that this will provide an additional booster for Malaysia’s macroeconomic fundamentals to further support MYR’s appreciation.

In the environment of elevated global commodity prices, inflationary pressure in Malaysia is affected by higher food inflation. MIDF expects food price growth to record +5.5% this year among others attributed to further depreciation of USDMYR. With domestic demand firming, it upgrades the headline CPI forecast slightly by +0.2% point to +3.0% for 2022. Moving into 2023, supply-push factors on inflation are expected to soften among others underpinned by the appreciation of USDMYR, moderation in food prices, further easing in global supply chain pressure and normalising commodity prices.

Thanks to GE15, Malaysia’s inflation outlook is much clearer for next year as we can expect the newly-formed unity government is very likely to keep the current fuel-subsidy mechanism status quo. As guided by Pakatan Harapan manifesto blueprint, the PH-led government may review monopoly practices on several agriculture-related items with the idea to increase output supply and lower food prices. If the status quo on the fuel subsidy is, hence headline inflation is predicted to hover between +2.3~2.5% for 2023.

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