KUALA LUMPUR: Malaysia can expect further deflation this year after its Consumer Price Index (CPI) declined 2.9 per cent year-on-year (y-o-y) in May, economists said.
This was the third month in a row that the CPI had been in decline, after a 2.9 per cent drop in April and another 0.2 per cent fall in March.
May's 2.9 per cent fall matched April's decline as the sharpest y-o-y drop in 10 years.
Economists cautioned that while deflation tends to have a positive effect on consumers in terms of decline in the prices of goods and services, the Covid-19 pandemic had significantly altered the dynamic.
Due to the pandemic-induced economic shutdown, there are increased fears around job prospects, employment status and wage reduction, which will negatively affect demand.
The Department of Statistics yesterday said the CPI decrease to 117.9 versus 121.4 in May 2019 was driven by the decline of transport (-20.8 per cent), housing, water, electricity, gas and other fuels (-2.6 per cent), clothing and footwear (-1.1 per cent) and furnishings, household equipment, and routine household maintenance (-0.2 per cent).
The items contributed 45.7 per cent to the overall weight of the CPI basket of goods and services consumed by an average household throughout the economy.
MIDF Research expects a CPI deflation at 0.5 per cent this year.
The firm said prices of utilities particularly electricity would continue to decline following the rebates under the government's stimulus packages for six months effective from April.
In addition, high volatility in global crude oil prices, which skewed towards the low-side, will influence fuel related components.
MIDF Research said as housing and utilities and transport were the biggest component in overall CPI basket after food and beverage (F&B), they would pose a significant impact to overall inflation.
Bank Negara Malaysia, the firm said, could make another 25 basis points (bps) cut in Overnight Policy Rate (OPR) this year.
This followed low inflationary pressure and downside risks to the economy including Covid-19, global trade tensions, political instability and the US presidential election, on top of the US' Federal Reserve's policy rate at 0.25 per cent.
Bank Negara has pulled off a hat-trick rate cuts so far this year, slashing the OPR three times in a row by a total of 100 bps to 2.0 per cent.
Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said the decline in CPI would mean the monetary policy space was widely open.
He said Bank Negara can always cut the OPR to provide further monetary stimulus to the economy.
"However, we believe the central bank would want to adopt a wait-and-see approach as they assess the effectiveness of the existing measures
"The gradual reopening of the economy would mean economic activities are picking up its pace. If it continues to hold, the case for additional stimulus is not strong. So we believe the OPR would stay at 2.0 per cent throughout the year," Afzanizam added.
Putra Business School business development manager Associate Professor Dr Ahmed Razman Abdul Latiff said the declining trend in CPI would not last long as the global oil price had recovered and climbed steadily with the Brent crude surpassing US$40 per barrel.
He said besides that, some countries had managed to contain the virus outbreak and started to open their borders and resume trading activities across all industries.
"Therefore the demand for products and services are expected to increase and this will cause CPI to increase again.
"If the market can recover quickly, probably there is no need to further cut down the interest rate during Bank Negara July's meeting," he said.