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PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 25 Jun 2019, 11:52 AM

 

April 2019 CPI - Remains Expansionary

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OVERVIEW

The Consumer Price Index (CPI) expanded further in April thanks to a smaller effect of the reduction in RON95 pump prices that was also pushed by YoY rises in RON97 (+9.5%) and diesel (+0.3%). April’s CPI sustained March’s momentum of +0.2%, a back-to-back positive reading for the year following a brief contraction in January (-0.7%). YTD average CPI of -0.2% remained a contrast against a year ago however (YTD 18: 1.6%), though this comes with a fair chance of advancing later.

CPI outlook will be influenced by multitude of factors including the government’s decision to roll out petrol subsidy for the B-40 group. This could be the driver for a more significant elevation in the CPI reading as a sizeable number of the population (M40 group and above) will soon be subjected to the global movement of oil prices. This could be rolled out later this year but not in 2Q19 as initially expected as the government is still working out the finer details. The CPI may also stage a rebound should global macro conditions improve amid intense US China trade negotiations. Positive resolution of the latter could spark a rebound in global oil prices and hence, inflation momentum.

Prospects of expansionary monetary policy in the US could also be the added driver given the increasingly less-than-favourable growth momentum in the US. BNM’s expansionary monetary policy recently could also encourage spending which may subsequently boost inflation. Prospects of Malaysia slipping into a deflationary trap appear small. Additionally, weak CPI numbers are being caused by the weak momentum in the transportation segment (April: -2.6%; March: -3.0%; February: -6.8%; January: - 7.8%), suggesting that it could be transitory. This is however being offset by the rise in housing, water, electricity, gas and other fuels (YTD: 2.0%), F&B (YTD: 1.0%), alcoholic beverages, tobacco (YTD: 1.1%) and restaurants and hotels (YTD: 1.1%) suggesting that consumption activities have been sustained, but only weak.

On a monthly- and seasonally-adjusted basis, CPI was flat (0.0%), similar to the month before. The official measure of core inflation remained steady, matching March’s 0.5% YoY gain (February: 0.3%; January: 0.2%), though still a notable deceleration against 2018’s average of 0.8%. Six (6) out of twelve (12) sub components registered gains for the month led by housing, water, electricity, gas and other fuels (+2.0%), education (+1.2%), and alcoholic beverages & tobacco (+1.1%).

EXPECT HIGHER INFLATION IN 2019

There is a fair chance that CPI may rebound in the near term driven by combination of factors as mentioned previously. This may also be driven by domestic cost factors including the rise in electricity tariff for businesses which is expected to be passed-through to consumers. Higher minimum wage (+4.7%; RM1,100) along with protracted weakness of the Ringgit may also support the rebound in CPI.

However, we also think that the CPI may get more lift from global conditions especially the outcome of US-China trade negotiations. A favourable outcome may spark a rally not only on commodity but also other asset class, a preamble of wealth creation and spending activities. On the flip side, however, a breakdown or prolonged negotiation may put a lid on the rise in inflation, conditions which we are facing at the moment.

STATUS QUO ON OPR IN 2019

OPR may stay at the current level unless global macro conditions slip further. This depends largely on the outcome of US-China trade negotiations. Barring unforeseen circumstances, OPR should remain steady for the rest of the year.

Source: PublicInvest Research - 27 May 2019

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