KUALA LUMPUR: The anticipation of a sharp decline in global oil prices will likely continue to weigh on cost of transport, signalling negative year-on-year (YoY) growth in headline inflation.
Affin Hwang Investment Bank Bhd said domestic retail petrol prices were still sharply lower compared to the corresponding period of last year.
This was despite domestic retail fuel prices of RON95 and RON97 rising from RM1.25 per litre and RM1.55 per litre respectively at the start of April to RM1.31 per litre and RM1.61 per litre respectively until May 22.
"The country's inflationary pressure will likely be weighed down by the ongoing electricity discount until September 2020.
"The drop in producer price index (PPI) from an expansion of 0.9 per cent in February to -1.9 per cent YoY in March also suggests that cost-push inflation will remain weak in the coming months," Affin Hwang said in a research note today.
The firm projected headline inflation to average 0.1 per cent for 2020 compared to 0.7 per cent in 2019 in view of near-term deflation risk.
It also expects Bank Negara Malaysia to maintain its overnight policy rate at the current level of 2.0 per cent for now.
"However, we do not discount the possibility of another rate cut in the fourth quarter of 2020, if economic activity continues to soften sharply in the second-half of this year, especially from the external environment."
Malaysia's headline inflation decreased sharply by 2.9 per cent YoY in April from -0.2 per cent in March mainly due to the drop in the cost of transport as well as housing, electricity, gas and other fuels.
This was the sharpest contraction in headline consumer price index (CPI) inflation since 2010, possibly indicating a risk of deflation.
However, when fuel for vehicles (domestic retail petrol prices) is taken out, CPI registered positive growth of 0.2 per cent in April compared to 1.3 per cent in March.
"Core inflation, which excludes administered and volatile price items, also remained steady at 1.3 per cent YoY for the third consecutive month in April," Affin Hwang said.
"Cost of transport, which accounts for 14.6 per cent of the total CPI basket, declined sharply for a second straight month by 21.5 per cent YoY (-8.9 per cent in March) due to the sharp drop in domestic retail petrol price of RON95 to RM1.27 per litre in April compared to RM2.08 per litre in April 2019.
Similarly, cost of housing and utilities fell by 2.2 per cent YoY from up 1.6 per cent in March could be due to the electricity discounts provided by the government, which began on April 1.
Inflation was also weighed down by the decline in cost of clothing and footwear (-1.2 per cent) as well as lower increases for the cost of furnishing (+0.3 per cent), restaurants and hotels (+0.7 per cent), recreation and culture (+0.6 per cent), education (+1.2 per cent), health (+1.2 per cent) and miscellaneous goods and services (+2.3 per cent).
However, price of food and non-alcoholic beverages remained steady, up 1.2 per cent YoY for April. In contrast, the cost of communication inched up from 1.5 per cent YoY in March to 1.6 per cent in April.