Inflation in Malaysia remained steady in June 2024, with the Consumer Price Index (CPI) maintaining a year-on-year increase of 2.0%, consistent with the previous month and slightly below market expectations. Core inflation, which excludes volatile items such as food and energy, also held firm at 1.9% year-on-year.

CGS International (CGS), said in its Economics Note today, the recent revision in diesel prices, implemented on June 10, 2024, saw prices surge from RM2.15/litre to RM3.35/litre as part of the government's subsidy rationalisation efforts.

This significant increase in diesel costs has begun to manifest in the CPI, particularly evident in the transport sector, which recorded a month-on-month increase of 0.5% in June. Diesel constitutes 0.2% of the CPI basket.

"Despite the immediate impact on transport costs, the broader effects on related sectors like transport services and food prices have yet to fully materialise, CGS said.

CGS suggests that the upcoming Producer Price Index (PPI) data, scheduled for release on July 29, may provide further insights into the extent of price pass-through from diesel costs to other components of the CPI.

"Looking ahead, economists project a potentially higher CPI trend in the second half of 2024 as government subsidies continue to be phased out. Factors contributing to inflationary pressures include expected revisions in fuel prices for RON95 gasoline and ongoing adjustments in diesel costs. Additionally, robust macroeconomic indicators such as increased retail sales and consumption imports are anticipated to sustain these price pressures."

In terms of monetary policy, the Bank Negara Malaysia (BNM) is expected to maintain the Overnight Policy Rate (OPR) at 3.00% through the end of 2024, barring significant shifts in inflationary trends or consumer spending. The central bank's cautious stance reflects a commitment to monitor economic reforms and their impact on inflation dynamics before considering any further adjustments to interest rates.

Overall, while Malaysia's economy shows resilience amid evolving fuel price dynamics and consumption trends, stakeholders are advised to closely monitor upcoming CPI and PPI releases for clearer signals on inflationary trends and policy directions.