Deflation hits Malaysia for the first time since 2009

Women pay their bills at a wet market in Shah Alam outside Kuala Lumpur January 22, 2014. The economy entered deflation in January for the first time in almost 10 years since November 2009. — Reuters pic
Women pay their bills at a wet market in Shah Alam outside Kuala Lumpur January 22, 2014. The economy entered deflation in January for the first time in almost 10 years since November 2009. — Reuters pic

KUALA LUMPUR, Feb 22 — The economy entered deflation in January for the first time in almost 10 years since November 2009 as consumer prices declined 0.7 per cent from a year ago.

UOB Global Economics and Markets Research, however, expected the drop in the consumer prices index (CPI) to be temporary and estimated headline inflation to rise to 2 per cent this year from 1 per cent in 2018.

“We expect headline inflation to revert back up once the high base effect in the transport component recedes and oil prices continue to rise,” said UOB Malaysia senior economist Julia Goh in a statement.

“As such, we maintain our inflation forecast of 2.0 per cent for 2019, on the back of a sustained recovery in oil prices, stable broadband prices, potential weather disruptions, and resilient domestic demand. The government has indicated that despite floating petrol prices, levels will be capped in order to manage cost pressures.”

January’s CPI revealed a steep 7.8 per cent drop in transport costs from a year ago, the biggest drop compared to other categories, which UOB attributed to petrol prices that were 8 per cent to 12 per cent lower compared to the same period last year.

Food and non-alcoholic beverage prices, however, rose 1 per cent from January 2018, with more expensive meat, fruits, and fish and seafood. Vegetables were cheaper last month from a year ago, however, declining 7.9 per cent.

Food at home was cheaper in January from a year ago, continuing to decline by 0.5 per cent, but food away from home rose 3.3 per cent year on year, with UOB observing more expensive burgers, fried chicken, rice with side dishes and noodle dishes.

Other categories that recorded lower costs in January compared to a year ago were clothing and footwear (-3.3 per cent), miscellaneous goods and services (-2.4 per cent), and communication (-1.2 per cent), which UOB attributed to domestic tax changes.

The Pakatan Harapan (PH) administration replaced the goods and services tax (GST) with the sales and services tax in September 2018, zero-rating the GST the prior three months.

Services inflation stayed resilient, said UOB, noting a 1.8 per cent rise in January year on year.

Consumer prices fell in all states last month year on year except for Kuala Lumpur that recorded a 0.2 per cent increase.

The increase in food and non-alcoholic beverage prices was especially prominent in Kuala Lumpur (3.7 per cent) and Johor (1.1 per cent).

UOB expects the central bank to maintain the overnight policy rate (OPR) at 3.25 per cent, saying: “Lingering risks are tilting the growth outlook on the downside. Major central banks have erred on the cautious side and some are taking a pause in rate actions.”