Published on 19 Nov 2019.
RAM Ratings expects Malaysia’s overall inflation rate to ease to 0.9% in October 2019 (September 2019: 1.1%), underpinned by a smaller contribution from the food component. This is because food inflation is envisaged to decelerate against the high-base effects from October 2018, when it had spiked up to 1.2% from 0.5% the month before.
Looking ahead, the short-term trend of inflation is envisaged to remain status quo amid the continuation of the fuel price ceiling until year-end. Moreover, the continued decline of the producer price index also indicates a smaller scope for cost pass-through to consumers over the next few months. As such, headline inflation is expected to come in at a benign 0.7% this year, before accelerating to 1.9% in 2020.
The uptick in inflation next year will be mainly driven by additional pressure from the switch to targeted fuel subsidies. That said, another potential upside risk to our estimate for 2020 is the slated increase in water tariffs next year, once the new Tariff Setting Mechanism (TSM) comes into effect. Details are still scant at the moment, with the Ministry of Water, Land and Natural Resources quoting a broad range for the potential rise (i.e. 7-70 sen per 1,000 litres). There has also been no mention of when these new rates will take effect.
“Although water supply only accounts for a 0.9% weight in the CPI basket, the extent to which it will augment overall inflation in 2020 will largely depend on the magnitude of the actual tariff hike and the timing of its rollout,” explains Kristina Fong, RAM’s head of research.
Woon Khai Jhek, CFA
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