Overall headline inflation remained unchanged for the third consecutive month at 0.2% y/y in May, falling slightly below the consensus of 0.3% y/y while core inflation eased slightly to 0.4% y/y in May from 0.5% y/y. So, the average headline inflation for the first five months remained in a deflationary -0.1% y/y, while core inflation was 0.4% y/y.

With underlying inflation on a weak trend, we believe our 1% inflation target for 2019 could be overestimated. However, the low base may provide some comfort to the inflation data besides cost-push pressure driven by rising commodity prices, underpinned by supply shortages and/or geopolitical risks. The impact from the OPR cut of 25bps in May to 3.00% may not have filtered in due to lagged effects. It is important to assess the impact as it will provide further light as to whether BNM will institute another cut in 4Q2019 to which our probability is at a low 30%.

• In line with our expectations, headline inflation remained unchanged for the third consecutive month at 0.2% y/y in May, falling slightly below the consensus of 0.3% y/y. Core inflation also eased slightly to 0.4% y/y in May from 0.5% y/y. So, the average headline inflation for the first five months remained in a deflationary -0.1% y/y, while core inflation was 0.4% y/y.

• A slight upward price pressure was seen in cost of food (1.2% y/y from 1.1% y/y), which was partially negated by housing & utilities prices (1.8% y/y from 2.0% y/y). The festive season likely explained the increase in food prices. However, transport prices continued to drop albeit at a slightly slower pace of -2.5% y/y from -2.6% y/y in April following lower fuel pump prices of RON95 which fell by 5.5% y/y while price per litre remained at RM2.08, the same as in April. Meanwhile, diesel reported flat growth at RM2.08/litre. In contrast, RON97 fuel pump prices jumped 11.0% y/y in May to RM2.74/litre from 9.5%y/y in April (RM2.71/litre).

• With underlying inflation on a weak trend, we believe our 1% inflation target for 2019 could be overestimated. However, the low base may provide some comfort to the inflation data. Besides, a slight upward nudge on prices could come from cost-push pressure driven by rising commodity prices, underpinned by supply shortages and/or geopolitical risks. The impact from the OPR cut of 25bps in May to 3.00% may not have filtered in due to lagged effects. It is important to assess the impact as it will provide further light as to whether BNM will institute another cut in 4Q2019 to which our probability is at a low 30%.

Source: AmInvest Research - 27 Jun 2019