Food Inflation Spike Concern Puts Overall Price Growth Forecast Higher at +2.8%

The continuous upward trend in core CPI indicates the underlying price pressures from surging domestic demand, underpinned by improving labour market condition and domestic reopening effects

Food Inflation Spike Concern Puts Overall Price Growth Forecast Higher at +2.8%

MIDF raises the average CPI forecast to +2.8% for 2022 citing the environment of elevated global commodity prices that is affecting inflationary pressure in Malaysia via higher food inflation.

"We expect food price growth to record at +4.5% this year (Initial estimate: +3.5%) among others attributed by removal of subsidies on several food items.

"As for fuel subsidy, we believe the government to maintain current mechanism at least until end of this year. With domestic demand firming, we revise our headline CPI forecast slightly higher, by +0.3%-point, to +2.8% for 2022," it says in its latest featured report on the economy.

Core inflation surged to almost 5-year high. As domestic demand strengthened, core inflation rose by +2.4%yoy, fastest gain since Aug-17.

The continuous upward trend in core CPI indicates the underlying price pressures from surging domestic demand, underpinned by improving labour market condition and domestic reopening effects.

Food inflation at decade high

Malaysia’s food inflation increased to +5.4%yoy, the highest since Nov-11. Price growth of food at home recorded +5.5%yoy (10-year high) while food away from home surged to 4-year high at +5.1%yoy.

Among the food items, meat inflation at +9.5%yoy (9-year high) and poultry inflation at +8.0%yoy, reaching a new peak. As a net-food importer, depreciation of USDMYR by -5.8%yoy in May-22 (close to 5-year low) had partially caused the food inflation spike.

"We raise our average CPI forecast to +2.8% for 2022. In the environment of elevated global commodity prices, inflationary pressure in Malaysia is affected via higher food inflation.

"We expect food price growth to record at +4.5% this year (Initial estimate: +3.5%) among others attributed by removal of subsidies on several food items. As for fuel subsidy, we believe the government to maintain current mechanism at least until end of this year. With domestic demand firming, we revise our headline CPI forecast slightly higher, by +0.3%-point, to +2.8% for 2022," says the analyst firm.

Core inflation surged to almost 5-year high

As domestic demand strengthened, core inflation rose by +2.4%yoy, fastest gain since Aug-17. The continuous upward trend in core CPI indicates the underlying price pressures from surging domestic demand, underpinned by improving labour market condition and domestic reopening effects.

This was in tandem with jobless rate which fell to new pandemic low of 3.9% in Apr-22. Slightly higher than Bloomberg’s consensus, Malaysia’s headline inflation inched up to +2.8%yoy in May-22. Non- food CPI rose by +1.7%yoy while food inflation hit more than a decade high at +5.2%yoy. On the month-on- month basis, headline CPI rose by +0.6%mom, fastest gain in 7-month.

Transport inflation edged up

The pace of increase in transport prices seen higher in May-22 albeit stronger fuel and non-fuel CPI.

Fuel inflation increased to +4.9%yoy (Apr-22: +3.9%yoy), limited by the cap imposed on retail fuel prices and diminishing low-base effect. This was in line with the Brent crude oil price which ascended to above USD120pbd during the month, level not seen in the past 10-year.

However, as long as the Government keeps the current fuel subsidy mechanism, we expect fuel inflation to remain at a moderate pace in 2HCY22. On the other hand, non-fuel inflation increased to 18-month high at +2.6%yoy.

"We opine rise in input inflation amid higher materials cost, labor shortages and depreciation of MYR among others add pressure on the costs of parts & accessories and repair & maintenance works. For other non-fuel transport segment, price growth of vehicles and transport services stayed in contractionary."

Food inflation at a decade high

Malaysia’s food inflation increased to +5.4%yoy, the highest since Nov-11. Price growth of food at home recorded +5.5%yoy (10-year high) while food away from home surged to 4-year high at +5.1%yoy.

Among the food items, meat inflation at +9.5%yoy (9-year high) and poultry inflation at +8.0%yoy, reaching a new peak. As a net-food importer, depreciation of USDMYR by -5.8%yoy in May-22 (close to 5-year low) had partially caused the food inflation spike.

MIDF says looking ahead, it expects Malaysia’s domestic food inflation to rise at gradual pace in 2HCY22 following the reduction of food subsidy support on several items. "We forecast food inflation to average at +4.5% for 2022 (2021: +1.6%)."

Peninsular Malaysia

By state, headline inflation in Peninsular Malaysia rose slightly to +2.9%yoy while Sabah and Sarawak increased by +2.2%yoy (6-month high) and +2.4%yoy (5-month high). Food prices and transport costs are the main contributors for most states.

Several months of high inflation

MIDF also says it expects the high inflation to remain for several months.

Most economies are facing upward inflationary pressure especially net energy importer countries.

For instance, headline inflation in the US surged further to +8.6%yoy in May-22, fastest pace in more than 40-year.

Euro Area saw a new record high price growth of +8.1%yoy. Asean economies namely Singapore, Thailand and Philippines saw inflation grew higher than +5.0%yoy level.

"Indonesia’s inflation rate inched up marginally partially due to Eid-ul Fitr celebration. Looking ahead, we view inflationary pressure to stay on uptrend as signalled by the energy prices. Brent crude oil price has been above USD100pbd for the past 5 months, and no weighty signal of for it to go down," it says.