January 2015 Consumer Prices

I’m back from my CNY break, and I hope everyone is back home safe and sound at this beginning of the Year of the Goat.

Last week’s inflation report was a huge surprise, not so much because inflation was down, but the magnitude far exceeded expectations (log annual and monthly changes; 2000=100):

Headline inflation fell to just 1.0% in January 2015, and the price level fell 1.1% between December and January. The Pain index crashed to –0.2% on an annual basis, and –2.5% on the month.

All of this was primarily driven by the drop in petrol and diesel prices (log annual and monthly changes; 2000=100):

RON95 prices were cut from a peak of RM2.30 per litre in October to just RM1.91 in January, with a further cut to RM1.70 in February (RM/litre):

This overshadowed a sharp jump in food prices, which were partly driven by the flooding on the East Coast and weather issues (log annual and monthly changes; 2000=100):

The consensus forecast missed January’s number by a long mile – even the lowest estimate was way higher than the number DOS reported. Part of the difficulty is that there’s been little precedent for this kind of volatility in CPI numbers in the past.

For the longest time, Malaysian economists have had the luxury of not having to deal with market price volatility of a major CPI component – increases in some food prices have often been offset by drops in other food prices, which smoothens overall food price volatility, while other components have tended to be pretty well behaved. With turbulence in the global oil markets now feeding directly into local CPI numbers, we’re having to make this up as we go along.

A couple of things of note here:

1. With the further drop of RON95 prices to RM1.70 in February, my current forecast is now just 0.3% headline inflation in February;
2. As Brent crude prices have rebounded this month, look for an equally sharp upward movement in March;

With this kind of volatility, I think there’s a need for an “official” core inflation series, for a couple of reasons. First, there’s a few different methodologies in use out there, and every analyst has his/her own way of calculating core inflation. As a result, there’s all sorts of different numbers out there, and it would cut down on confusion if there was an “official” version. Secondly, having an official core measure would better portray underlying inflation and potential policy responses. For the sake of anchoring inflation expectations and policy credibility, we really should have a core measure that everyone can trust.

Technical Notes:

January 2015 Consumer Price Index report from the Department of Statistics