MIDF Research raises 2023 inflation forecast to 2.5% due to higher food prices

MIDF Research has slightly raised its headline inflation projection by 0.2 points to 2.5% for 2023, following a higher food price growth forecast of 4.5% from 4.0% previously.

In a research note on 24th March, the research house said that supply-push factors are expected to ease moving into 2023.

MIDF Research said the easing is attributable to, among others, the appreciation of the ringgit, mild correction in global commodity prices and better supply chain flow.

“Judging from the re-tabled Budget 2023, we believe the government will keep fuel subsidies, especially RON95, on status quo until the end of the year. Any targeted RON95-subsidy measures will be rolled out in 2024,” it said. 

MIDF Research said this following the Department of Statistics Malaysia's (DOSM) report that Malaysia’s Consumer Price Index (CPI) for February 2023 remained unchanged at 3.7%.

On February’s CPI data, it said inflationary pressure was still burning in Malaysia, with the headline inflation rate maintained at 3.7% year-on-year (y-o-y), slightly higher than market estimates of 3.6% y-o-y. 

“Non-food inflation moderated to an eight-month low by 2% y-o-y whereas food inflation increased to a three-month low by 7% y-o-y. 

“Elevated global commodity prices, depreciation of ringgit versus US dollar and firming domestic demand were among factors holding up inflation pressure in Malaysia,” it said. 

MIDF Research also said the main contributor to the pick-up in inflation was mainly caused by Peninsular Malaysia, where there was elevated food inflation and a slight uptick in utility price growth.

Supply-side price pressure to ease

Meanwhile, AmBank Group, in a research note, said that Malaysia’s headline inflation was 0.1% above the market’s expectation. 

It said on a month-on-month (m-o-m) basis, headline prices increased by 0.2%, the same pace as the previous month.

“Overall, we maintain our forecast that the headline inflation is expected to be at 3.0% in 2023. 

“The slowdown is partly reflecting overall commodity prices that have eased compared to last year and improving supply chain and logistics.

“Therefore, price pressure coming from the supply side should ease,” it said. 

AmBank Group said it also observed the same on the demand side, where wage growth in both the manufacturing and services sectors has been on a downward trend since the third quarter of 2022.

“Employment activities, which is correlated with core inflation, is also slowing down after peaking at 4.5% back in July 2022,” it said.

AmBank Group also said that while inflation is anticipated to continue receding in the coming months, any upside surprise could stem from a sharper depreciation of the ringgit, logistic issues for food supply, and changes in the retail petrol prices.

On Overnight Policy Rate (OPR) expectation, it maintained the call for another 25 basis points (bps), pushing the rate to 3.0%.

“The push is largely driven by the need to anchor core inflation and to preserve a positive real rate position. 

“We see the possibility for the rate increase to take place in the upcoming meeting in May, after the pause in January and March, to allow the economy to adjust to the cumulative 100 bps rate hike made last year,” it added.

Meanwhile, SPI Asset Management managing director Stephen Innes said the February 2023 CPI reading was broadly in line with its and Bloomberg’s consensus expectations. 

“Given the sticky core inflation, we continue to expect the Bank Negara Malaysia (BNM) to deliver another 25 bps rate hike in May. 

“But with the BNM on inflation data-dependent mode, there is an equal chance if core inflation falls or if US banking system contagion risk hits Malaysia, the call would be no hike,” he said.