February CPI was also affected by the drop in the transport group as fuel prices slipped.
KUALA LUMPUR: RAM Ratings expects the May headline inflation rate to increase to 1.9% from the 1.4% in April mainly due to faster increase in retail fuel prices compared to a year ago.
In its report issued on Tuesday, the rating agency said the increase in retail fuel inflation of 5.1% in May, compared to a 0.3% contraction in April, was for the most part due to a low base effect.
It pointed out the average RON95 fuel price in May 2017 was significantly lower at RM2.09 a litre, down from April 2017’s RM2.21 a litre.
However, since March this year, RON95 prices were unchanged at RM2.20 a litre and they were expected to remain from May 2018 onwards amid the reinstatement of subsidies.
“As such, inflationary pressure from the retail fuel component is also anticipated to rise for the months of June and July, as the low base effect from a year ago increases.
“Uncertainty remains over the overall inflation outlook for 2018 as more policy measures are being unveiled by the new administration, with the change in tax system (from GST to Sales and Services Tax (SST)) being the most pertinent to the full-year estimation,” it said.
RAM Rating said while the move to zero-rate the GST effective June 1 was expected to reduce overall inflationary pressure, the reintroduction of the SST may to some extent offset the deflationary impact of the former, subject to the final tax rate and coverage when the SST regime is put in place in September.
It will closely monitor the development of the regime to assess the expected full-year inflation rate for 2018.
“Withholding the impact of the SST’s implementation for now until more definite details are available, full-year overall inflation is envisaged to average 1.6%,” said RAM's head of research Kristina Fong.
She said the expectation was based on the reinstatement of fuel subsidies, lower prices amid the zero-rating of the GST and a persistently weak food price growth trajectory.
While some uncertainties remain over the GDP and inflation outlook, pending the unveiling of other new policies, both indicators are anticipated to moderate in 2018 after having rebounded last year.
“As such, we maintain our view that there will be no further movement in the OPR (3.25%) for now and expect Bank Negara Malaysia’s future actions to be data-dependent,” she said.
RAM will keep abreast of any developments in the policy direction of the new administration in its crucial first 100 days, especially concerning any potential change to the current GDP growth trajectory and risk of heightened inflation, which may then warrant a change in monetary policy.
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