In November, the PPI rose 4.3% y/y, bringing its 11-month average to 7.3%. The data suggests the PPI has peaked in July and is on a softening trend. The slower gain in the PPI is partly due to a moderate increase in the cost of intermediate inputs which rose by 2.8% y/y in November from 4.9% y/y in October and that could be due to the stronger MYR against the USD, hence helping to ease the cost of imports. Meanwhile, the cost of crude materials and finished goods grew firmer by 13.6% y/y and 0.3% y/y in November respectively. We believe the overall cost of doing business is gradually becoming more contained. With the MYR showing signs of a firmer outlook in 2018 against the USD, coupled with stable commodity prices, we expect the PPI to continue rising at a moderate pace. We expect the impact of the high base to slow the gain of the PPI reading in the coming months. We project our headline CPI and PPI to average around 4.0% and 7.3% respectively in 2017 and 2.5%/3.0% respectively in 2018. In the meantime, we still expect BNM to raise the current OPR of 3.00% by 25bps in January underpinned by a growing demand-pull inflation. We expect the OPR to normalise at 3.50%.

• In November, the PPI rose 4.3% y/y from 4.7% y/y in October, bringing its 11-month average to 7.3%. The data suggests the PPI has peaked in July and is on a softening trend.

• The slower gain in the PPI is partly due to a moderate increase in the cost of intermediate inputs which rose by 2.8% y/y in November from 4.9% y/y in October and that could be due to the stronger MYR against the USD, hence helping to ease the cost of imports.

• Meanwhile, the cost of crude materials and finished goods grew firmer by 13.6% y/y and 0.3% y/y from 10.2% y/y and 0.2% y/y in October respectively.

• In tandem with the weaker cost of intermediate inputs, we found the manufacturing input cost, which accounts for 78.8% of the total PPI weightage, rising at a slower pace by 2.8% y/y in November from 3.6%y/y in October. The input cost from agriculture, forestry and fishing fell to -1.8% y/y from +4.3% y/y in October.

• The input cost from the mining sector continued its double-digit growth for 12 consecutive months. In November, it surged by 30.7% y/y from 19.6% y/y in October which partly explains the higher crude material cost.

• We believe the overall cost of doing business is gradually becoming more contained. With the MYR showing signs of a firmer outlook in 2018 against the USD, coupled with stable commodity prices, we expect the PPI to continue rising at a moderate pace. We expect the impact of the high base to slow the gains of the PPI reading in the coming months.

• We project our headline CPI and PPI to average around 4.0% and 7.3% respectively in 2017 and 2.5%/3.0% respectively in 2018. In the meantime, we still expect BNM to raise the current OPR of 3.00% by 25bps in January 2018 underpinned by a growing demand-pull inflation. We expect the OPR to normalise at 3.50%.

Source: AmInvest Research - 2 Jan 2018