Malaysia’s headline inflation slows to year-long low of 2.8% in May, but core inflation may stay sticky
Tan Ai Leng
[KUALA LUMPUR] With food and transport prices rising more slowly, Malaysia’s year-on-year inflation slowed further to 2.8 per cent in May, the lowest since May 2022, Department of Statistics Malaysia figures indicated on Friday (Jun 23).
This was also lower than the 3 per cent projection by 18 economists in a Reuters poll, and down from April’s rate of 3.3 per cent. Core inflation – which excludes volatile items and those with government-administered prices – moderated marginally to 3.5 per cent in May, from 3.6 per cent in April.
Economists said that despite the visible fall in headline inflation, core inflation – which is driven by demand – is sticky and may persist in the near term as domestic demand remains robust.
In a note on Friday, Barclays senior regional economist Brian Tan said that while the country’s exports and industrial production are cooling due to slowing external demand, the services sector still appears to be holding up, supported by high employment and robust retail sales.
Malaysia’s job market has been improving, with employment growth staying around 2 per cent or higher for 19 straight months since October 2021. Retail sales grew nearly 13 per cent in April.
On a monthly basis, Malaysia’s consumer price index rose by a marginal 0.2 per cent in May, slightly more than April’s 0.1 per cent rise. For the first five months of 2023, inflation was 3.4 per cent, compared to 2.4 per cent in the same period last year.
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In a report, MIDF Research anticipated that food inflation, the main driver of inflation growth, will trend lower at around 5 per cent this year. However, the ringgit’s prolonged depreciation will lead to higher imported inflation as Malaysia is a net importer for most food products, they added.
Five out of 12 main consumer segments experienced slower price growth in May. They are:
- Food and non-alcoholic beverages (5.9 per cent, from 6.3 per cent in April)
- Furnishings, household equipment and routine household maintenance (2.7 per cent, from 3 per cent)
- Health (1.9 per cent, from 2.1 per cent)
- Transport (1 per cent, from 2.3 per cent)
- Clothing and footwear (0.4 per cent, from 0.5 per cent)
In the communications segment – the only area which had a drop – prices continued to fall by 3.7 per cent, after declining 1.4 per cent in April. Inflation for recreation services and culture remained unchanged at 1.8 per cent.
The remaining five categories recorded higher inflation:
- Restaurants and hotels (6.7 per cent, from 6.6 per cent in April)
- Miscellaneous goods and services (2.9 per cent, from 2.5 per cent)
- Education (1.9 per cent, from 1.6 per cent)
- Housing, water, electricity, gas and other fuels (1.8 per cent, from 1.6 per cent)
- Alcoholic beverages and tobacco (0.7 per cent, from 0.6 per cent)
In May, prices rose for 77 per cent of the items in the index: 426 out of 552. Among these, the prices of 27 items went up by more than 10 per cent. Prices fell for 88 items.
As inflation continues to moderate, economists believe that Malaysia’ central bank will maintain its stance on pausing interest rate hikes next month.
OCBC Bank senior Asean economist Lavanya Venkateswaran said that the need for further monetary tightening has been reduced, as inflation pressures ease and slower growth is expected for other economic indicators. Nevertheless, there are still uncertainties that will affect Bank Negara’s decision, such as the US Fed’s aggressive rate hikes and persistent ringgit depreciation, she added.
MIDF Research stood by its view that elevated core inflation may lead Bank Negara to consider another interest rate hike of 25 basis points in July, which will bring the overnight policy rate to 3.25 per cent.
Malaysia’s inflation rate has remained lower than that of some other Asia-Pacific markets, including the Philippines (6.1 per cent), Indonesia (4 per cent) and South Korea (3.3 per cent). It was also lower than in the eurozone (6.1 per cent) and the United States (4 per cent).
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