September 24, 2025
PETALING JAYA – Malaysia’s low inflationary environment is likely to continue for the rest of the year and possibly extend into 2026, economists say.
An important enabler for this is the government’s decision to move away from its previous plan to remove RON95 petrol subsidy for the top 15% income earners.
Prime Minister Datuk Seri Anwar Ibrahim, who is also the Finance Minister, has recently announced that all eligible citizens will qualify for up to 300 litres of subsidised RON95 petrol per month at RM1.99 per litre.
The new mechanism, called Budi95, no longer filters recipients using income levels.
While the new approach would mean much lower annual savings for the government, down from the RM8bil projected previously to roughly RM2.5bil-RM4bil, it would help keep household expenditures more manageable for many Malaysians, apart from being a politically popular decision.
Socio-Economic Research Centre executive director Lee Heng Guie said that a 2.9% drop in RON95 price starting end-September will reduce the consumer price index (CPI) by 0.15 percentage points directly.
“Following the rationalisation of fuel subsidies, factors like global energy and commodity price volatility, on-going geopolitical conflicts as well as lingering tariffs uncertainty and its spillover effect on costs via indirect channels would alter the outlook of inflation.
“The US Energy Information Administration expects crude oil prices to remain low, possibly in the US$50 to US$60 per barrel range for Brent crude in 2026, driven by a market oversupply. This means continued lower prices of fuel.”
Against such a backdrop, Lee expects headline inflation in Malaysia to increase between 1.3%-1.4% year-on-year (y-o-y) in the remaining months of 2025.
This will be driven mainly by food and beverage prices, healthcare, food away from home amid moderated prices of transportation.
The Statistics Department reported yesterday that headline inflation in August 2025 was recorded at 1.3%
While this was in line with market projections, the headline inflation rate was marginally higher than July’s 1.2%.
Core inflation, meanwhile, increased 2% in August as compared to 1.8% in the previous month. This marked the fastest reading in four months but still signalling mild underlying price pressures.
Drawing a comparison with other countries, the Statistics Department said inflation in Malaysia was lower than in Vietnam (3.2%), Indonesia (2.3%) and South Korea (1.7%).
“However, the rate was higher than Thailand (minus 0.8%) and China (minus 0.4%),” it said.
According to Chief Statistician Malaysia Datuk Seri Mohd Uzir Mahidin, about 59.7% of items in the CPI (342 out of 573 items) recorded price increases.
Nonetheless, out of this total, 332 items (97.1%) registered an increase of less than or equal to 10%, while only 10 items recorded increases of more than 10% in August 2025.
The remaining 185 items (32.3%), showed a decline and 46 items remained unchanged.
State-wise, a total of 10 states recorded increases below the national inflation rate of 1.3% with Kelantan recording the lowest inflation (0.1%) in August 2025.
However, four states recorded increases above the national inflation level namely Johor (2%), Selangor (1.5%), Terengganu (1.5%) and Negri Sembilan (1.4%).
In a note, MBSB Research said the slightly higher reading of 1.3% in August signals that inflation continued to accelerate gradually from 1.1% y-o-y in June 2025, which was the lowest print of the year.
It also pointed out that the inflation for food away from home remained elevated at 4.3% y-o-y, similar to the previous month.
In contrast, prices of food at home remained in contraction but at a lesser pace of minus 0.1% y-o-y.
“Given the still mild inflation reading, we adjust our 2025 CPI inflation forecast lower to 1.4% from 1.8% previously. In 2024, the inflation was registered at 1.8%.
“We continue to expect potential rise in price pressures stemming from policy changes (such as broadening of sales and service tax coverage), but we foresee a more modest pickup than we had initially forecasted in view of the subdued cost pressures in the recent months and the delay in the rollout of targeted RON95 subsidy,” stated MBSB Research.
Looking ahead, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the “upside risk to inflation is low”, especially after Anwar’s latest announcement on the RON95 petrol subsidy.
In addition, the ringgit’s appreciation could, to some degree, help to contain the price pressure, especially for imported goods.
“On that note, the inflation rate could settle below 2% in 2025 and possibly in 2026 as well,” according to Mohd Afzanizam.
IPPFA Sdn Bhd country economist, Mohd Sedek Jantan, also foresees headline inflation to settle below 2% this year, or specifically at 1.8%.
However, Mohd Sedek cautioned that inflation would rise above the forecast 1.8%, if there is a spike in global energy prices.
This is assuming the higher energy prices could offset the targeted fuel subsidy’s 2.93% reduction (from RM2.05 to RM1.99 per litre) and reverse the 2.2% decline in CPI’s transport category.
Meanwhile, supply chain disruptions, particularly in food and beverages due to weather or geopolitical tensions, could further elevate costs.
On the Budi95 subsidy plan, Mohd Sedek said it is unlikely to spark price increases and may even provide stabilising effects.
“Fuel alone accounts for nearly 40% of the Transport sub-index of the CPI, so the six sen per litre RON95 petrol subsidy reduction translates into measurable disinflationary pressure, estimated at about 0.13% reduction in headline CPI.”
“While it is not income-targeted in the strict sense, the cap introduces a self-limiting feature that supports fiscal consolidation.
“Over time, savings from subsidy rationalisation – earmarked for education, healthcare, and infrastructure – could reinforce productivity and competitiveness, embedding longer-term resilience into Malaysia’s economic framework.”