Analysts expect headline inflation to trend lower in the coming months as the Consumer Price Index (CPI) for February 2023 remained unchanged at 129.8 or 3.7 per cent.

Chief Statistician Mohd Uzir Mahidin added that core inflation, which measures changes in the prices of all goods and services (excluding volatile prices of fresh food as well as government-controlled prices of goods), registered a slower increase of 3.9 per cent y-o-y in February 2023.

“The highest increase was recorded by the food and nonalcoholic beverages group at 7.6 per cent,” he said in the statement.

“In addition, the restaurants and hotels group also recorded an increase of 7.4 per cent, followed by transport (6.2 per cent), furnishings, household equipment and routine household maintenance (3.4 per cent) and housing, water, electricity, gas and other fuels (1.9 per cent).”

Analysts with Kenanga Investment Bank Bhd (Kenanga Research) believed headline inflation will trend lower around the three to 3.5 per cent level, as a result of the government’s ongoing efforts to reduce the cost of living, sluggish global demand, tighter financial conditions and falling commodity prices.

“This coupled with the expectation that the government may continue to provide fuel subsidies throughout the year, may continue to bring inflation down,” Kenanga Research said.

“Nonetheless, there are still some potential risks that could drive inflation upwards, such as an increase in tourism activity and heightened geopolitical uncertainty.”

Bank Negara Malaysia (BNM) is expected to maintain the overnight policy rate (OPR) at 2.75 per cent at the upcoming monetary policy meeting in May as Kenanga Research reckoned that the central bank has reached the end point of its policy normalisation cycle, mainly due to signs of a decrease in inflationary pressure and as the global economy slows, exacerbated by the banking crisis.

“Looking ahead, barring any unforeseen developments in both the global and domestic economy, it is likely that the BNM may hold its current policy stance until end of the year.”

The team with AmBank Research also maintained its forecast that the headline inflation is expected to be at three per cent in 2023.

“The slowdown is partly reflecting overall commodity prices that have eased compared to last year and improving supply chain and logistics,” it said in its own notes. “Therefore, price pressure coming from the supply side should ease.

“We observe the same on the demand side, where wage growth in both manufacturing and the services sectors are on a downward trend since 3Q2022. Employment activities, which is correlated with core inflation, is also slowing down after peaking at 4.5 per cent back in July 2022.”

While inflation is anticipated to continue receding in the coming months, AmBank Research said any upside surprise could be stemming from sharper depreciation of the Ringgit, logistic issues for food supply, and changes in the retail petrol prices.

“On the interest rate outlook, we maintain the call for another 25 basis points (bps) rate hike this year, pushing the OPR to three per cent largely driven by the need to anchor core inflation and to preserve 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 100bps rate hike made last year.”