Malaysia: Inflation surprised to the upside in May – UOB

UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting review the latest inflation figures in Malaysia.

Key Takeaways

“Headline inflation accelerated to 2.8% y/y in May (from 2.3% in Apr), surpassing our estimate (2.6%) and Bloomberg consensus (2.7%). Approximately 67% of 12 consumer price index (CPI) components recorded a larger annual gain in prices as compared to the preceding month, led by food & non-alcoholic beverages, transport, recreation services & culture, restaurants & hotels, as well as housing, utilities & other fuels segments. This suggests broader second-round effects on consumer prices from higher energy prices, raw material and labour shortages.”

“Going into 2H22, we expect CPI growth to trend higher as low-base effects kick in and the government has begun to gradually adjust prices of administered item amid elevated global commodity prices, currency weakness, and recovering domestic demand. Headline CPI growth may breach 5.0% at some point in 3Q22 should headwinds persist and the government further adjust subsidies for other price-administered items, posing upside risks to our 2022 full-year headline inflation outlook which is at 3.0% currently (BNM est: 2.2%-3.2%, 2021: 2.5%).”

“Given signs of broader second-round effects on consumer prices, ongoing domestic recovery, and latest developments in global financial markets, we think there is room for Bank Negara Malaysia (BNM) to follow-through with another 25bps rate hike at both the 6 Jul and 8 Sep monetary policy meetings. Hence, our updated OPR projection is 2.50% by end-2022.”