March’s headline inflation fell into deflation for the first time since February 2019 by 0.2% y/y from +1.3% y/y in February, (our expectations was -0.3% and consensus was -0.1%).

The drag on headline inflation was due to the sharp drop in global oil prices with Brent averaging at US$33.7 per barrel in March, down 39.2% m/m and hence lowering our transport prices due to cheaper pump prices. The headline inflation averaged at 0.9% y/y in 1Q2020 while core-inflation held steady at 1.3% y/y, averaging at 1.4% y/y.

Inflation is projected to stay weak in 2020 due to lack of overall pressure from cost-push and demand-pull inflation. Inflation is more likely to average around +0.3% with room to tread into a deflationary reading of - 1.5%. Should the headline inflation fall into deflation, this will be the first, based on data going back to 1983.

Hence, a 25bps cut in the current OPR which is at 2.50% by BNM during the May 5 meeting is being factored in, with now a 40% chance of 50bps cut as the potential incoming data for March and April will be worse than February’s.

• March’s headline inflation fell into deflation for the first time since February 2019. It fell by 0.2% y/y from +1.3% y/y in February, a tad higher than our expectation of -0.3% while market consensus stood at -0.1%. This brings inflation to average at 0.9% y/y in 1Q2020.

• Meanwhile core inflation, a measure excluding volatile prices such as fresh food and administered prices of goods and services, stood firm at 1.3% y/y for the second consecutive month. Average core inflation was 1.4% y/y in 1Q2020.

• The drag on March’s inflation was primarily due to the sharp drop in transport prices which plunged to -8.9% y/y – touching a nearly four-year low, from +2.4% y/y in February. It was due to the drop in global oil prices. Crude oil price for Brent averaged US$33.7 per barrel in March versus US$55.5 in February (US$67.0 March 2019). As a result, our petrol pump prices fell across the board for RON95, RON97 and diesel by -16.2% y/y to RM1.74/litre, -18.5% y/y to RM2.05/litre and -13.3% y/y to RM1.89/litre, respectively in March.

• But food and non-alcoholic beverage prices jumped to 1.2% y/y in March from 0.8% y/y in February. Among the index of goods which recorded price increases were small onion (34.6% y/y; Feb: 33.8% y/y), garlic (33.8% y/y; Feb: 33.4% y/y) and big onion (29.9% y/y; Feb: 21.8% y/y).

• Inflation is projected to stay weak in 2020 due to lack of overall pressure from cost-push and demand-pull inflation. Inflation is more likely to average around +0.3% with room to tread into a deflationary reading of -1.5%. There is not much cost pressure, partly due to weak commodity prices, added with an economy that is plagued with excess capacity. Demand is poised to be weak due to rising job losses and loss of income from the virus impact that has dragged down the economy. Should the headline inflation fall into deflation, this will be the first, based on data going back to 1983.

• Hence, a 25bps cut in the current OPR which is at 2.50% by BNM during the 5 May meeting is being factored in, with now a 40% chance of a 50bps cut as the potential incoming data for March and April will be worse than February’s.

Source: AmInvest Research - 23 Apr 2020