Flashnote: Transitory Factors Lift Inflation up to 4-Year High

Food and transport price inflation key contributors to April headline inflation


Headline inflation accelerated to a 4-year high of 4.7% y/y in April (from +1.7% y/y in Mar), largely due to transitory factors (i.e. higher commodities prices and food supply disruptions) and the lapse of electricity rebates that were introduced last year to relieve consumers’ burden during the fight against the COVID-19 pandemic. It also came amid the implementation of tighter COVID-19 containment measures and price control scheme for Hari Raya Aidilfitri during the month. April’s inflation rate was below our estimate (+5.9%) and Bloomberg consensus (+4.9%).

Consumer price inflation averaged 1.6% in the first four months of 2021 (Jan-Apr 2020: -0.04%), implying that our full-year inflation target of 3.0% remains achievable (official forecast: 2.5%-4.0%; 2020: -1.2%). Headline inflation is projected to reverse course and come off to below 4.0% levels from Jun onwards. Rising pandemic-related risks and a weak labour market will continue to mitigate the impact of supply-led inflationary pressures, keeping overall inflation in check.

We expect Bank Negara Malaysia (BNM) to remain on hold for the rest of the year, following its unchanged expectations of a robust GDP growth of 6.0%-7.5% for 2021 (despite a nationwide MCO 3.0) and a transitory price increase. In addition, real interest rate has turned negative for the first time since Dec 2017 last month, while underlying inflation remains muted with continued spare capacity in the economy. BNM is seen favouring targeted financial and non-financial assistances to help affected sectors to weather through the ongoing pandemic.

By Julia Goh
Senior Economist, UOB Malaysia