KUALA LUMPUR: Malaysia's core inflation has surged to an almost five-year high as domestic demand strengthens.
The headline inflation rose to 2.8 per cent year-on-year (YoY) in May, the fastest gain since July 2017, to surpass Bloomberg consensus of 2.7 per cent.
Food and non-alcoholic beverages price inflation saw an accelerated increase to 5.2 per cent YoY last month, the highest level since October 2012.
UOB Malaysia senior economist Julia Goh and economist Loke Siew Ting said all food items logged a persistent price hike, particularly meat which was up by 9.5 per cent YoY compared to 6.2 per cent increase registered in April.
Both price inflation of food at home and food away from home spiked up to 5.5 per cent (April: 4.1 per cent) and 5.1 per cent(April: 4.4 per cent) respectively.
On a month-on-month (MoM) basis, consumer price index (CPI) rose the most in seven months by 0.6 per cent (April: 0.2 per cent).
This brought year-to-date inflation to an average of 2.4 per cent in the first five months of 2022 (January-May 2021: 2.1 per cent.
In May, 67 per cent of 12 CPI components recorded a larger annual gain in prices as compared to the preceding month, led by food a non-alcoholic beverages, transport, recreation services and culture, restaurants and hotels, as well as housing, utilities and other fuels segments.
"The food price index as a whole posted the largest increase since October 2011 of 5.3 per cent YoY while the non-food price index rose 1.7 per cent.
"This suggests broader second-round effects on consumer prices from higher energy prices, raw material and labour shortages," Goh and Loke said in a note today.
Core inflation rose for eight straight months to 2.4 per cent (April: 2.1 per cent), marking the highest level since July 2017, they added.
They said it had also risen above the 2016-2021 long-term average of 1.4 per cent for five consecutive months.
Going into the second half of 2022, they 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.
The government recently announced the removal of the ceiling price for chicken and chicken eggs, as well as subsidies for cooking oil in bottles of 2 kilogram (kg), 3kg and 5kg, from July 1.
"The price of chicken is expected to be raised by 12 per cent to 35 per cent following the removal of the ceiling price, while that of chicken eggs is expected to be hiked by 10 per cent to 30 per cent.
"As for cooking oil, the government is currently subsiding about RM6.00 per kg based on market price of around RM8.50 per kg.
"These policy changes are expected to lift this year's headline inflation by 0.3 percentage points (ppt)-0.5ppt, without taking into account targeted relief measures by the government," they said.
They also noted that headline CPI growth might breach five per cent at some point in third quarter should headwinds persist and the government further adjust subsidies for other price-administered items.
Bank Negara Malaysia is also expected to follow through with another 25 basis points (bps) rate hike at both monetary policy meetings on July 6 and September 8 given signs of broader second-round effects on consumer prices, ongoing domestic recovery, and latest developments in global financial markets.
"Hence, our updated overnight policy rate projections are 2.5 per cent by end-2022 and three per cent by end-2023.
"Even after projected hikes of 75bps for this year, monetary policy would still be accommodative as it only reverses part of the 125bps of rate cuts during the pandemic," they added.