KUALA LUMPUR: MIDF Research anticipates that the government will cut retail fuel prices, particularly the RON95 and diesel, to ensure price stability and ease living cost pressure in Malaysia.

If the government cuts the RON95 price by 10 sen to RM1.95 per litre next month, Malaysia's headline inflation is likely to ease to 2.9 per cent for 2023 as non-food inflation moderates further towards 1.3 per cent, while transport price experiences deeper contraction of -1.7 per cent, it said in a note today.

By year-end, the 10 sen cut will bring the monthly headline inflation rate lower to +1.9 per cent year-on-year (y-o-y), it said, adding that this also means that the government would have an additional RM4.31 billion in fiscal expenditure, which can be utilised for other objectives.

"On top of that, the government will have even better fiscal space, given that fiscal debt-to-gross domestic product (GDP) ratio has fallen to 59.3 per cent in the first quarter of 2023, and including contingent liabilities, the latest figure is 76.1 per cent," MIDF Research said.

According to the consumer price index (CPI) weightage, transport cost is the third largest burden after food as well as housing and utilities.

"Considering the continuous elevated food inflation and downward income pressure, we anticipate the government to opt for slashing retail fuel prices, particularly RON95 and diesel in the near term.

"Structurally, being a net food importer and aggravated by depreciated ringgit, it will be hard for the government to contain food inflation," the research house said.

During the first half of this year (1H 2023), the Brent crude oil price averaged at US$79.2 (US$1=RM4.57) per barrel, slightly lower than government's estimate of US$80 per barrel.

As such, MIDF Research estimated the non-subsidised market price for RON95 to be RM3.10 per litre.

In 2022, the RON95 price differential against market price widened to RM1.86 per litre.

"Thanks to normalising global oil price, the fuel price differential is estimated to be much lower at RM1.05 per litre this year. With the lower price differential, we believe the total subsidy expenditure will be lower than last year.

"From 2011 to 2013, the RON95 price differential was more than RM2.00 per litre as the global oil price hovered above US$100 per barrel, while the retail price of RON95 was kept at RM1.90-1.95 per litre," it said.

In the 1H 2023, food prices surged by 6.2 per cent y-o-y (2022: 5.9 per cent), while non-food prices increased by 1.7 per cent y-o-y (2022: 2.2 per cent).

"We believe that the continuous depreciation of the ringgit is among the contributing factors to the high food inflation in Malaysia.

"Moreover, the elevated food inflation indicates that food prices are stickier (on the upside) amid robust domestic spending," said MIDF Research.

Meanwhile, CGS-CIMB said the recent dismantling of the Black Sea grain corridor -- where the agreement to allow exports of food and fertiliser from both Ukraine and Russia to the global market has not been renewed -- may have an adverse effect on food inflation, leading to higher price volatility.

Although the spike in global commodity prices is still well below the recent historical peak reached in 2022, this warrants close monitoring, it said.

Back home, it said government intervention in items such as chicken price and electricity should contain inflation in the near term.

"The government has decided to continue subsidising chicken and eggs in 2H 2023, and electricity tariffs for domestic users were also extended in 2H3, easing the risk of domestic-driven inflation.

"As such, we maintain our CPI forecast at 2.8 per cent y-o-y in 2023," it said.

Malaysia's CPI registered a slower growth rate of 2.4 per cent y-o-y in June (+2.8 per cent in May), marking the lowest level observed since April 2022, and in line with market projections.

The core inflation rate, which excludes volatile and administered price items, increased at a slower rate of +3.1 per cent y-o-y in June (+3.5 per cent in May).

-- BERNAMA