Weekly fuel price mechanism tones down inflationary pressure

The drop in headline inflation is explained by the steep contraction in transport prices.

KUCHING: Analysts believe the implementation of the weekly fuel price mechanism has toned down inflationary pressure which softened last month.

“Thanks to weekly pricing method, average price of RON95 went down to RM2.20 in April. The 10 cent deduction has caused a deceleration in transport as well as fuels and lubricants prices during the month,” outlined MIDF Amanah Investment Bank Bhd (MIDF Research) in a note yesterday.

Headline inflation rate was recorded at 4.4 per cent while core inflation maintain stable at 2.5 per cent in April.

Non-food inflation grew lower than March’s by 1.1 per cent but on a flip side, food inflation expanded steadily by 4.1 per cent in April. On a monthly basis, headline inflation recorded negative growth. The drop in headline inflation is explained by the steep contraction in transport prices.

Transport inflation rose by 16.7 per cent year on year (y-o-y), lower than the previous two months. This indicates that cost-driven factors are cooling off as retail year-on-year fuelprice differential gradually converge in April.

“In addition, the weekly pricing method indirectly reduces pessimism among consumer on the fuel price and if there is a slight hike, consumers do not have to bear the cost for long,” it added.

“Based on the current global oil price movement, we foresee Brent crude oil price will move upwards in the near term as global oil producers are more likely to resume the oil production limit agreement until the end of the year.

“Therefore, we foresee our retail fuel price will have upward bias in the next few weeks. Based on our estimate, every US$1 increase in Brent price will causes retail fuel price to rise by four cents.”

Moving on, MIDF Research expected Malaysia’s inflation rate to moderate but uncertainty in global oil prices would have a substantial impact on a broader price trend.

“Food inflation stayed at 4.1 per cent in April. Food inflation increases by 0.1 per cent on monthly basis. All prices of foods increase at stable rates during the month with fresh fish and seafood remain the highest growth at 6.6 per cent and 6.2 per cent respectively,” it detailled.

“The stabilised food inflation could be due to gradual pick-up in demand and also lesser impact from fuel price shocks. However, we opine food inflation to expand higher in May and June as Ramadhan and Eid-Festival will create extra demand on goods especially foods.”

All these led the firm to maintain its inflation forecast of 4.5 per cent in 2017.

“With the weekly pricing method, we believe inflation will be less impacted as the weekly changes in fuel price will cause a delay in the spill over effects to consumers and businesses. The cost push inflation is expected not to have material impact toward broader prices trend.

“The core inflation remain stable at 2.5 per cent indicating stable underlying price movement. Thus, with stable demand conditions, we do not foresee current inflationary concern will affect Banke Negara Malaysia’s existing monetary stance.”

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