Inflation shows signs of easing in Malaysia

Rate cuts are likely as early as in the first half of the year, says an economist.

Leif Eskesen, Chief Economist for India and ASEAN at HSBC, reported:

Facts
Headline CPI decelerated to 3.0% y-o-y in December (vs. 3% in November), the lowest in nine months. It was exactly in line with our forecast and a tad lower than the consensus call of 3.1% (Source: Bloomberg). Sequentially, prices rose by 0.1% m-o-m sa, unchanged from the previous month, and 0.5% on 3m-o-3m sa (vs. 0.6% in November). This took the full year inflation to 3.2%.

Core inflation held steady at 2.0% y-o-y and was literally flat in sequential terms (vs. 0.2% in November).

The moderation in the annual print was led by transport (1.9% y-o-y vs. 3.9%y-o-y in November), partly the result of a base effect. Food prices, which account for one third of Malaysia's CPI, stayed at 5.1% y-o-y. However, both saw inflation pick up in sequential terms (transport: 0.2% m-o-m sa vs. 0.1% in November; food: 0.3% m-o-m sa vs. 0.0 in November).

Core inflation components were a bit mixed. Inflation rose for furnishings (2.5% y-o-y vs. 2.3% in Nov) and clothing (0.8% y-o-y vs. 0.1% in November), but this was offset by a slight moderation of prices in other core categories.

Implications
Inflation is finally showing signs of easing in Malaysia, although underlying inflation pressures are still holding up.

The moderation in annual headline inflation can be mainly attributed to the high base of transport category, which saw an upward adjustment to administered energy prices in December 2010. Inflation for most other prices stayed where somewhat mixed and inflation for the key food category remains sticky given the lingering effect of floods in Thailand and areas of Malaysia.

Having said that, the slowdown in global demand will dampen domestic economic activity and gradually moderate inflation pressures. In this context, global commodity prices could ease somewhat, which would also have an impact on activity in the commodity driven economy and directly impact inflation.

In turn, this is likely to eventually see growth risks dominate inflation risks, compelling Bank Negara to throw in some rate cuts, probably as early as in H1 2012. Further uncertainty about the economic outlook for the Eurozone would only fast-forward the easing cycle.

Bottom line: Inflation edged lower in December, although partly the result of base effects. However, slower growth is expected to translate into a moderating in inflation, eventually setting the stage for a couple of rate cuts to cushion the slowdown.