Inflation likely to trend higher from this month

The Star

22-07-2025

PETALING JAYA: While June recorded a lower-than-expected inflation rate of 1.1% – the lowest in 52 months, the disinflation trend is not expected to sustain in the months ahead.
June's headline inflation brought inflation for the first half of 2025 (1H25) to 1.4% year-on-year (y-o-y), lower than the 1.8% recorded in 1H24, indicating continuing disinflation since its peak in 2022.
The rise was lower than the 1.2% increase forecast in a Reuters poll.
Core inflation during the month was unchanged from May at 1.8%.
The effects of the expanded sales and service tax (SST), wage adjustments under civil service reforms and the RON95 subsidy rationalisation initiative in 2H25 continued to pose key upside risks to the inflation outlook.
UOB senior economist Julia Goh said headline inflation is expected to trend higher from July because of the potential 'second-round effects' from the expanded SST, despite its limited direct impact, as well as 'low base effects' from the previous year.
'We anticipate upward pressure from key components particularly food away from home and services inflation,' she told StarBiz.
Goh said the tax-induced inflation effect is expected to be one-off, but also cautioned that the 'long-anticipated' RON95 subsidy rationalisation initiative remained as a key uncertainty, and 'could alter the inflation path'.
'Nevertheless, we expect full-year inflation to average at 1.8% – which is below Bank Negara's projected range of 2% to 3.5% (2024: 1.8%),' she said.
Goh maintained that the inflation outlook remained benign over the policy horizon.
She opined that another 25 basis points cut in the overnight policy rate to 2.5% by the end of the fourth quarter of 2025 was plausible should downside risks to growth – particularly from potential tariff actions and geopolitical tensions escalate.
'A more accommodative monetary policy stance may be warranted to support domestic growth into 2026, considering that monetary policy typically takes about a year to exert its full impact on the economy,' she said.
iFAST Capital research analyst Kevin Khaw Khai Sheng said although the June inflation data came in within his expectation, the disinflation trend may not be 'sustainable' given measures such as targeted subsidy rationalisation, possible fuel price flotation, and wage adjustments for the civil service.
'We believe that the consumer price index (CPI) has already bottomed out, and an increase is possible in the next one to two months.
'One thing that we are closely observing is the service cost which tends to be sticky. That said, it is not alarming at this juncture, as we have not seen a huge spike,' he said.
According to Khaw, the base case is for the central bank to maintain its policy rate in 2H25 given that inflation remains manageable.
That said, he noted that an additional rate cut is possible in the event of unprecedented external economic shocks.
Meanwhile, Sunway University economics professor Dr Yeah Kim Leng said the disinflation trend could prolong due to a combination of external and domestic factors.
Externally, global uncertainties are having a depressing impact on demand which could dampen commodity prices.
'Global commodity prices especially fuels have eased as US global tariffs and geopolitical uncertainties have dampened consumer and business spending.
'They have contributed to the disinflationary trend for most countries except for those facing tariff escalations and the ensuing supply chain shocks,' he said.
Yeah said supply chain adjustments to tariff increases would exert upward price pressures although the effects would be uneven across countries since higher import tariffs would raise producer and consumer prices.
'As exports to the United States are being diverted due to unilateral tariffs imposed by the Trump administration, excess supplies in Asia and other regions could also exert downward pressures on prices, thereby prolonging disinflation in these countries including Malaysia,' he said.
A stronger ringgit will also ease imported prices. As of the end of June, the local unit has strengthened by over 5% against the US dollar.
'The delay in the RON95 subsidy rationalisation will likewise postpone the onset of a potential source of inflation, although this will likely be offset by higher price pressures resulting from the increase in the national minimum wage and labour shortages in selected industries,' Yeah said.
OCBC senior Asean economist Lavanya Venkateswaran said June's inflation figures were weaker-than-expected on account of transportation inflation.
She added that the overall inflation picture had been benign with headline CPI averaging 1.4% y-o-y in 1H25, and she had reduced the 2025 headline CPI forecast to 1.5% from 2% previously.
'The inflation prints for 1H25 paint a picture of well-contained price pressures.
'Subdued headline inflation of 1.4% in 1H25 and reduced prospects of RON95 rationalisation, following the government's need for a more detailed review of the mechanism have led us to reduce our full year forecast. We had previously expected a 20% to 25% increase in RON95 prices from October,' Lavanya said.
While she had pencilled in another 25 basis point rate cut from Bank Negara for the remainder of the year, Lavanya said it was important to look at the trajectory of core inflation as a gauge for domestic demand conditions.
'Core inflation remaining higher than headline inflation suggests that domestic demand is holding up even as the more volatile components of inflation eased in 1H25,' she added.