Headline inflation rose at the slowest pace by 0.2%y/y in August bringing the year-to-date average to 1.3%y/y. The three and half year low August inflation figure was due to (1) continued effects from the removal of GST in June; (2) “base” effect;(3) fading cost of transportation as the RON95, RON 97 and diesel rose slowly rose slowly by 3.8% y/y, 10.5% y/y, and 6.9% y/y,; (4) stronger ringgit based on y/y comparison, up 4.5% y/y in August though on m/m it fell by 1.1%; and (5) weak demand pull pressure.

Looking ahead, we foresee some inflationary pressure in the month of September owing to the reintroduction of SST, but the upside is expected to be limited since around 5,443 items are being declared exempt compared to GST with only 544 items were declared exempt. How much prices will rise depends on how well both the manufacturers and service will be able to implement the changes as well as how much of the tax is passed on to consumers. We reiterate our full year inflation average to be at 1.5%, with the high side at 1.8%. On that note, we expect BNM to maintain the current 3.25% OPR rate.

• Headline inflation rose at the slowest pace by 0.2%y/y in August from 0.9%y/y in July, bringing the year-to-date average to 1.3%y/y. Much slower inflation was due to the continued effects from the removal of GST in June; the “base” effect; fading cost of transportation as the RON95, RON 97 and diesel rose slowly by 3.8% y/y, 10.5% y/y, and 6.9% y/y, respectively; and stronger ringgit which gained 4.5% y/y in August though on m/m it fell by 1.1%.

• Meanwhile, core-inflation remained in the negative growth trajectory for the second consecutive month. Core-inflation in August fell at the same pace as in July by -0.2%y/y, suggesting demand pull pressure remains tame.

• Looking ahead, we foresee some inflationary pressure in the month of September owing to the reintroduction of SST. We believe the new SST regime should result to moderate rise in prices in contrast to the GST since around 5,443 items are being declared exempt compared to GST with only 544 items were declared exempt. How much prices will rise depends on how well both the manufacturers and service will be able to implement the changes as well as how much of the tax is passed on to consumers.

• We reiterate our full year inflation average to be at 1.5%, with the high side at 1.8%. On that note, we expect BNM to maintain the current 3.25% OPR rate.

Source: AmInvest Research - 20 Sept 2018