Global oil prices key driver of headline inflation in 2021

Published on 22 Apr 2021.

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RAM has revised its full-year inflation projection for 2021 to 3.0%, from 2.3% (2020: -1.2%). This is due to higher sustained average Brent crude prices, which we have pegged at USD60/barrel this year, from our previous estimate of USD45-USD50/barrel. Oil prices have been stronger than expected this year, driven by positive sentiment, controlled output by OPEC+ and winter storm disruptions in the US. While prices are envisaged to moderate in 2H 2021 as production gradually increases, they should still be supported by stronger demand relative to 2020.

The average price of RON95, a key driver to transport fuel inflation, climbed 17.6% y-o-y to RM2.05/litre in March – a stark contrast to the 5.7% y-o-y contraction in February, amid higher crude oil prices and more pronounced low-base effects. March’s headline inflation is estimated to have accelerated to 1.7%, from 0.1% in February.

Brent crude prices remain a key driver of our inflation forecast for 2021. Every USD5 movement in the average price of Brent crude is estimated to alter Malaysia’s 2021 headline inflation by about 0.4 percentage points, barring any second-round effects on prices. However, the inflationary impact of further price increases beyond USD60/barrel is capped by the fuel price ceiling currently in place.

Meanwhile, inflation for all the other sub-components is expected to remain subdued this year due to still sluggish demand and negative output gap. The electricity tariff rebate in 1H 2021 under the imbalance cost pass-through (ICPT) mechanism will also help mitigate some inflationary pressure.

Figure 1: Fuel price cap shields inflationary
pressure from higher oil prices
        Figure 2: Significantly higher inflation in
2Q 2021 amid low-base effects from previous year

Sources: RAM, Ministry of Domestic Trade, Co-Operatives & Consumerism, and US Energy Information Administration
Note: Shaded area in LHS chart represents incremental inflation without price ceiling


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