Headline inflation in May rose at a slower pace by 3.9%y/y after growing above the 4% level since February 2017. Despite registering a slightly slower gain, inflation for the first five months grew 4.2%, which remains above our full-year average of 4.0%. There were no major surprises on the inflation numbers. Cost pressures remain the key drivers i.e. (1) strong Producer Price Index numbers suggest transfer pricing remains; (2) costlier transport prices amid more expensive fuel.; and (3) the weak ringgit against the USD explains the increase on core CPI. Although the inflation data may have eased slightly in May, we still expect the overall inflationary pressure to stay in the coming months. Cost pressure will remain as the key culprit in preventing inflation from sliding apart from the base comparison. Also, demand-pull inflation should kick in, especially with the improving economic activity reflected by the strong 1Q2017 GDP of 5.6%y/y, healthy corporate earnings and firm labour market. Thus, it has raised our probability for the door to open slightly wider to a 45% chance from 30% previously for a rate hike by Bank Negara in 2H2017 by 25 basis points.

• Headline inflation in May rose at a slower pace by 3.9%y/y after growing above the 4% since February 2017. Despite registering a slightly slower gain, inflation for the first five months grew 4.2%, which remains above our full-year average of 4.0%.

• There were no major surprises on the inflation numbers. As expected, the pressure is still from the cost side. We saw firm gains from producer prices which rose 9.4%y/y for the first four months of 2017 driven by higher prices of intermediate materials up 7.3%y/y YTD. This should result to further levels of transfer pricing on consumer items.

• Besides, inflation will continue be driven by the transport segment. Transport prices jumped 13.1%y/y in May from 16.7%y/y in April due to more expensive fuel prices. We found the average price of 1 litre of RON95 petrol was RM2.09 in May 2017 versus RM1.70 in May 2016, while RON97 average price was RM2.37 in May 2017 compared to RM2.05 in May 2016. Fuels and lubricants for personal transport equipment account for 7.8% of the CPI weights.

• Also, the cheap ringgit against the USD will continue to knock on the doors of inflation. The ringgit on average against the USD fell 7.6%y/y for the first five months of 2017. This probably explains why core inflation inched up in May, up 2.6%y/y after staying stubbornly at 2.5%y/y since February. Food prices climbed 4.4%y/y in May.

Source: AmInvest Research - 22 Jun 2017