Inflation jumps in Feb, spurred by water tariff and holiday spending

KUCHING: Malaysia’s headline inflation in February has jumped 1.8 per cent year on year (y-o-y) or 0.5 per cent month on month (mo-m), spurred by the new water tariff and increased spending during the Lunar New Year (LNY) holiday period.

In an economic viewpoint report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) guided that they found the February headline inflation reading to be unexpected as they were anticipating that after three consecutive months of inflation sitting stagnant at 1.5 per cent y-o-t, inflation during the month would moderate downwards to 1.4 per cent y-o-y instead.

The February readings had also surprised consensus expectations as the consensus forecast was that inflation would continue to stay steady at 1.5 per cent y-o-y during the month.

According to Kenanga Research, the surprising February reading was largely attributed to greaterthan-expected impact of the new water tariff which saw an average increase of RM0.22 per cubic meter of water.

Feb inflation for housing, water, electricity, gas and other fuels reached its highest level since Sept 2022 at 2.7 per cent. This was driven by a rise in rental costs of 2.2 per cent and a 28.8 per cent increase in water bills.

Besides this, the research arm also noted that increased spending during the LNY had caused transport inflation to surge.

“Data from Trip.com indicates a significant surge in inbound travel to Malaysia during this year’s LNY festive period compared to 2023, with a notable 53.9 per cent increase,” said the research arm.

The increased tourism during the month caused recreational and sporting activities to increase by 1.2 per cent after seeing 0 per cent growth in Jan and restaurant and accommodation services to grow by 0.6 per cent after seeing -0.1 per cent negative growth in Jan.

Moreover, the festive period also caused transport inflation to surge to a ten-month high of 1.2 per cent as domestic flight ticket prices surged by 52.7 per cent during the month. This in turn caused the overall cost of public transport services to surge from 2.6 per cent in Jan to 4.2 per cent.

Meanwhile, inflation for food and non-alcoholic beverages had moderated from 2.0 per cent in

Jan to 1.9 per cent.

This was the lowest level recorded in 29 months and was partly due to muted growth in prices of food at home as meat and vegetable prices lowered.

When compared to other major advanced and developing economies, Kenanga Research noted that inflation registered in the US, Japan and China were also on the rise.

US headline inflation grew by 3.2 per cent after cooling to 3.1 per cent in Jan, Japan grew by 2.8 per cent from 2.2 per cent in Jan, and China grew by 0.7 per cent from a -0.8 per cent deflation in the previous month. This is the first price increase after fourt months of deflation and was caused by higher spending during the LNY.

“However, domestic demand remains weak and property buying remains subdued,” Kenanga Research added.

Looking ahead, Kenanga Research believes that Malaysia’s 2024 consumer price index (CPI) will end up growing at 2.7 per cent, higher than the 2.5 per cent increase recorded in 2023.

On a macro level, they guide that this forecast is premised on the anticipation that extreme weather conditions from climate change and escalating geopolitical tensions may push food prices higher in the near-term.

Additionally, the upcoming fuel subsidy rationalisation in the second half of the year (2H24) as well as an anticipated rise in tourism is expected to further exacerbate overall living prices.

Likewise, the research arm of MIDF Amanah investment Bank (MIDF Research) and RHB Investment Bank Bhd (RHB Research) also reckon that the upcoming fuel subsidy rationalisation in the second half of the year (2H24), adjustments in services tax and further growth in tourism is expected to further exacerbate overall living prices can cause the inflation momentum to gain pace in 2H24.

“Looking into 1H24, we should expect a gradual pick-up in overall prices following increase in utility charges, implementation of higher SST rate to 8.0 per cent on selected items and 10 per cent for low value goods tax (LVGT).

“In the later half, we opine that it is possible that the rollout of fuel targeted-subsidy may see higher retail fuel prices of both RON95 and Diesel,” MIDF Research shared.

RHB Research maintains their 2024 headline inflation projection at 3.3 per cent y-o-y while MIDF Research maintains their 3.2 per cent y-oy- forecast.