Headline inflation to ease to 1.8 per cent

KUCHING: RAM Ratings expects the headline inflation rate to ease markedly to 1.8 per cent in February 2018, following two consecutive months of declines which saw rates of 2.7 per cent in January 2018 and 3.5 per cent in December 2017.

According to RAM Ratings, the lower inflation in February is primarily attributable to a negative growth contribution from transport fuel amid lower retail fuel prices and high-base effects from the previous year.

“The average price of RON95 fell RM0.02 to RM2.26 per litre in February 2018, in contrast to the sharp upward revision of RM0.20 to RM2.30 per litre in February 2017,” it said.

The ratings firm noted that as the high-base effect is expected to continue moderating contribution from the transport component, headline inflation is envisaged to ease to 2.5 per cent in 2018, compared to 3.7 per cent in 2017.

On the price growth of the food and non-alcoholic beverage component, RAM Rat ings highlighted that it is expected to persist this year.

“The average growth of this component is expected to come in

The average price of RON95 fell RM0.02 to RM2.26 per litre in February 2018, in contrast to the sharp upward revision of RM0.20 to RM2.30 per litre in February 2017. RAM Ratings

at 3.7 per cent this year, slightly lower than the four per cent charted in 2017, as some of the one- off cost-push factor fades.

“The component is also envisioned to remain the key driver of headline inf lation given its significant weight in the consumer price index (CPI) basket.”

“The food and non- alcoholic beverage component still carried a significant weight of 29.5 per cent in January 2018, despite having been revised downwards from 30.2 per cent.”

RAM Ratings went on to note that the price of natural gas – a fuel mostly used by industry rather than households – was revised upwards in January 2018.

“While the effective average gas tariff in the first half of 2018 (1H18) is 23.6 per cent higher year on year (y- o-y), there is as yet no broad- based notable uptick in consumer prices.

“This indicates that businesses have likely not passed on the cost increase, as they assess and devise an optimal pricing strategy.”

The ratings firm will continue monitor ing the market ’ s willingness to pass on this cost increase to assess the risk to overall inflation in 2018.

Based on its expectations of more moderate gross domestic product ( GDP) growth and inflation of a respective 5.2 per cent and 2.5 per cent in 2018, RAM Ratings did not envisage further hikes in the overnight policy rate this year.

Despite the ratings firm’s basecase assumption, Bank Negara Malaysia’s future actions are expected to be data- dependent.

“Another rate hike may be warranted if GDP growth surprises on the upside and inflationary risk heightens.”