CGS-CIMB: Malaysia’s escalating inflation is likely to peak in 3Q 2022

INFLATION in the country is likely to peak either in August or September 2022 with year-on-year (yoy) growth potentially trending lower in the months ahead, trailing close to 4.0% by end-2022 and towards 3.0% by end-2023.

CGS-CIMB Research attributed this to the dissipating low base effect from the rise in commodity prices in 2H 2021 as well as its consumer price index (CPI) model assumption of a modest decline in global commodity prices in 2H 2022.

“Thus far, most major commodity indices peaked in 1Q 2022 apart from natural gas amid geopolitical developments in Europe,” justified economist Nazmi Idrus in a review of Malaysia’s August CPI.

“As a result, price pressures on key items such as chickens, eggs, and cooking oil should ease as input costs drop.”

Malaysia’s headline inflation rose to +4.7% year-on-year (yoy) in August (July: +4.4% yoy; 8M 2022: +3.1% yoy) mainly on rising food & non-alcoholic beverages cost while core inflation was up to +3.8% yoy (July: +3.4% yoy).

(Editor’s note: Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month such as food and energy prices)

That said, one concern the CGS-CIMB Research has is with the imported inflation from the weakening of ringgit which could lead to higher cost of goods.

On a yoy basis, the ringgit has depreciated against the greenback by 5.8% in August 2022, hence increases the likelihood of additional cost to be borne by producers importing in the US dollars.

“Nevertheless, we believe producers are likely to absorb mild price increases in the short term,” opined the research house. “Overall, we maintain our 2022F CPI projection at 3.1% (2023F: 3.2%).”

Despite the uptrend in core inflation, CGS-CIMB Research expects rate normalisation by Bank Negara Malaysia (BNM) to pause during its forthcoming November meeting given greater concerns over weakening global outlook.

“Nonetheless, we expect two more +25bp hikes in 1H 2023,” projected the research house.

Meanwhile, Maybank IB Research maintained its 2022 and 2023 inflation rate forecasts at +3.3% and +4.0% yoy respectively.

“(Our) forecasts also consider the impact of announced and expected rationalisation in price subsidies for essential food, fuel and energy (eg removal of bottled cooking oil price subsidies in July 2022) as well as assumption of some adjustments in fuel prices and electricity tariffs due to subsidy reviews in 2023,” noted economist Dr Zamros Dzulkafli.

With the firm annual inflation rate plus stronger economic growth in 2Q 2022 and this year, Maybank IB Research expects BNM to raise its overnight policy rate (OPR) further by +25 basis points (bps) to 2.75% by end-2022 during its Nov 2-3 Monetary Policy Committee (MPC) meeting.

“We also expect another +25bps hike early next year to bring OPR back to the pre-COVID-19 level of 3.00% by end-1Q 2023,” added the research house. – Sept 26, 2022

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