Malaysian CPI inflation rises slightly in August, likely to remain on lower path

Malaysia’s headline consumer price index inflation accelerated slightly to 1.5 percent year-on-year in August, owing to higher food prices. On a month-on-month basis, CPI inflation rose 0.4 percent. Non-alcoholic beverages and food prices, which account for 30 percent of the CPI basket, were up 3.5 percent year-on-year, more than mitigating lower transport prices that dropped 6.7 percent year-on-year. The Malaysian central bank, in its recent monetary policy statement in September, noted that it expects inflation to ease to the 2 – 3 percent forecast range for the whole of 2016.

Lower oil prices are expected to help restrict inflationary pressures, in addition to the high base of comparison emerging from the implementation of GST in the earlier year, said ANZ in a research note. A weaker Malaysian ringgit might not necessarily translate into considerably higher inflation.

The pass through impact of a weaker currency into inflation is expected to be incomplete because of rigidity in price adjustments and administered prices for certain essential items. Moreover, producers are not expected to be able to pass on higher imported costs entirely to consumers who might opt for cheaper substitutes.

At this point, the balance of risks is still tilted towards growth disappointment, possible fiscal slippage, with inflation pressures of second-order concern, according to ANZ. A considerable deceleration in private consumption, particularly with tighter credit conditions weighing on household demand would probably trigger the Malaysian central bank to lower t he rate during the final meeting of 2016 on 23 November, added ANZ.