The Producer Price Index (PPI) fell for the second straight month, with February’s reading at -3.4% y/y, bringing the average for the first two months to -2.3% y/y. The drag in the PPI came from agriculture and manufacturing while from the components’ side, it attributed to all three components i.e. crude materials, intermediate materials and finished goods.  We expect the potential PPI to most likely be in the negative trajectory, a trend we last saw in 2015 which lasted until 3Q2016 due to: (1) a stronger Malaysian ringgit (MYR) against the USD which helps soften the cost of imports; (2) stable commodity prices; (3) a high base. Thus, consumer inflation will be less vulnerable to cost-push pressures and more on demand pressures due to stable wage growth and a labour market that is supported by a firmer GDP outlook. While Bank Negara projects consumer inflation between 2% and 3% for 2018, our forecast is 2.8% with our lower end at 2.5%.

• The Producer Price Index (PPI) fell for the second straight month. February’s PPI dropped much more than January’s with a dreading -3.4% y/y from -1.2% y/y in January. This brings the average for the first two months to -2.3% y/y.

• The poor PPI figures were due to the sharp drop from agriculture and manufacturing, down by -16.2% y/y and -2.6% y/y respectively which more than offset the 3.1% y/y rise from the mining segment. Besides, we saw negative PPI reading from all the three components i.e. crude materials, intermediate materials and finished goods, down by -5.8%, -2.9% and -2.1% respectively.
• We expect the potential PPI figures to most likely be in the negative growth trajectory, a trend we last saw in 2015 which lasted until 3Q2016. Key reasons are: (1) a stronger Malaysian ringgit (MYR) against the USD which helps soften the cost of imports; (2) stable commodity prices; (3) a high base.
• With the PPI poised to stay weak, pressure on consumer inflation will be less impacted from the cost side apart. The focus on the cost side will be on fuel prices. Much of the consumer inflation pressure will come from the demand side, underpinned by stable wage growth and a labour market which is being supported by the firmer economic outlook. While Bank Negara is looking at a consumer inflation of between 2% and 3% for 2018, we are looking at 2.8% with our lower end at 2.5% for the year.

Source: AmInvest Research - 2 Apr 2018