Diesel Price Hike Impact on Inflation is Less than Expected

Malaysia’s headline inflation, which came unchanged year-on-year at 2% in June, is projected to remain steady for the rest of 2024, on the muted impact from the recent diesel subsidy rationalisation, say analysts. The 2% increase in consumer price index (CPI) in June was lower than the 2.2% increase predicted in a Bloomberg survey.

Malaysia floated retail diesel prices on June 10, in an effort to address its ballooning subsidy bills and curb smuggling activities.

The decision put a spotlight on its impact towards prices. Efforts to curb price shocks include targeted subsidy to approved transportation fleets and logistic companies.

Following the lower-than-expected CPI, UOB Research has revised its inflation projection to 2% in 2024 (from 2.6% previously). The research house said it has “recognised a much smaller-than-anticipated impact from the diesel subsidy rationalisation and benign inflation reading of an average 1.8% in the first half of 2024 (1H2024).

However, inflation risks are still tilted to the upside pending RON95 fuel subsidy rationalisation, the effects of Employees Provident Fund (EPF) withdrawals from recently introduced Account 3, and salary hikes for civil servants by year end.

HSBC Global Research also described the June CPI print to have delivered “a downside surprise” despite the diesel subsidy rationalisation. The research house expects Malaysia’s inflation to fall within Bank Negara Malaysia’s (BNM) forecast of between 2% and 3.5% this year. It has forecast Malaysia’s CPI in 2024 to be at 2.4%, according to its past reports. The direct impact [of diesel subsidy] should be limited, as diesel only accounts for 0.2% of the CPI basket. The indirect impact, which is the primary concern, appears to have been contained too. This is due to the mitigating impact the government has put in place in tandem with the removal of diesel subsidies.

RHB Research said that the direct impact of diesel subsidy float in Peninsular Malaysia would be “marginal”. The research house maintained its headline inflation projection at 2.6% in 2024.

Subsidies will continue for most of the diesel-powered commercial vehicles and for public transportation and most of Malaysia’s motor vehicles consume petrol [accounts for 90% of the vehicles registered with Malaysian Road Transport Department] as their primary fuel choice versus diesel users at around 7%.

Meanwhile, MIDF Research has kept its headline inflation forecast of 2.7% in 2024. The higher-than-street forecast is in anticipation of gradual inflation pickup in Peninsular Malaysia in 2H2024 from the diesel subsidy retargeting. As for Sabah and Sarawak, MIDF expects minimal transportation price pressure as diesel prices remain unchanged.

This is good news for the average consumer. It is when RON95 moves up that the gyrations will be felt. The Government may defer this to 2025 or later.

Reference:

Diesel price hike impact on inflation less than expected, say analysts on June CPI surprise, Anis Hazim, TheEdgeMalaysia, 24 July 2024