Headline inflation to ease to 1.8%, says RAM

PETALING JAYA: RAM Rating Services Bhd expects headline inflation to ease markedly to 1.8% in February, following two consecutive months of decline.

In January, headline inflation fell to 2.7% while in December, it was down to 3.5%.

“The lower inflation in February is primarily attributed to negative growth contribution from transport fuel amid lower retail fuel prices and high-base effects from the previous year,” RAM Rating said in a statement.

The average price of RON95 fell two sen to RM2.26 per litre in February 2018, in contrast to the sharp upward revision of 20 sen to RM2.30 a litre in February 2017.

“As the high-base effect is expected to continue moderating contribution from the transport component, headline inflation is envisaged to ease to 2.5% in 2018 from 3.7% last year,” it said.

RAM Ratings expects price growth of the food and non-alcoholic beverage component to persist this year, with average growth of this component expected to come in at 3.7%, slightly lower than the 4% charted in 2017.

It added that this component would remain the key driver of headline inflation, given its significant weight in the consumer price index basket.

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

The price of natural gas, a fuel mostly used by industry rather than households, was revised upward in January 2018. While the effective average gas tariff in the first half of 2018 was 23.6% higher year-onyear, there was 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,” RAM Ratings said.

The rating agency will continue monitoring the market’s willingness to pass on this cost increase to assess the risk to overall inflation in 2018.

“Based on our expectations of a more moderate gross domestic product (GDP) growth and inflation at 5.2% and 2.5%, respectively, in 2018, we do not envisage further hikes in the overnight policy rate this year,” it said.

The rating agency said despite its base-case assumption, Bank Negara’s future actions were expected to be data dependent.

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

The food and non-alcoholic beverage component still carried a significant weight of 29.5% in January 2018, despite having been revised downward from 30.2%.