The Producer Price Index (PPI) continued to grow at single digit for the seventh straight month due to moderate increase in the prices of intermediate (+6.6% y/y) and finished materials (+1.0% y/y), partly due to the firmer Malaysian ringgit (MYR) against the USD, with slower gains from electricity and gas supply cost (+1.2% y/y) and a sharp fall in water supply cost (-0.4% y/y).

We feel that the overall cost of doing business is fairly contained supported by the firmer USD/MYR and stable commodity prices. But the low base comparison could throw off the PPI reading to some extent. We reiterate our 3.7% CPI projection for 2017 with our base case of no change to the 3.00% OPR in 2017 while holding our 45% chance for the OPR to be raised.

• The Producer Price Index (PPI) continued to grow at single digit for the seventh straight month. In September, the PPI rose 6.0% y/y from 6.7% y/y in August, bringing the first eight months’ average to 8.0% y/y.

• The slower gain in the PPI was due to a moderate increase in the prices of intermediate which rose 6.6% y/y in September from 7.7% y/y in August as well as finished materials, which were up 1.0% y/y in September from 1.1% y/y in August. This could partly be due to the firmer Malaysian ringgit (MYR) against the USD.

• Also, we noticed the electricity and gas supply cost rose at a slower pace as in September by 1.2%y/y from 1.7% y/y in August while the cost of water supply fell 0.4%y/y in September from a strong +0.8% y/y in August, the first decline since April 2017.

• On the whole, we feel that the overall cost of doing business is fairly contained. With the MYR presenting a firmer outlook against the USD, added with stable commodity prices, we expect the PPI to continue rising at a moderate pace. However, the low base comparison could throw off the PPI reading to some extent.

• We reiterate our 3.7% CPI projection for 2017 with our base case of no change to the 3.00% OPR in 2017. At the same time, our view of a 45% chance for the OPR to be raised by 25bps in 4Q2017 remains.

Source: AmInvest Research - 1 Nov 2017