- Malaysia’s Consumer Price Index (CPI) grew by 1.8% YoY in June (May: 1.8%), which was broadly in line with both ours and consensus growth expectations of 2.0% and 1.9% respectively.

- Specifically, core-inflation advanced by 1.2% YoY in June compared to +1.1% YoY in May. Meanwhile, the cost component of Food and Non-alcoholic beverages, which account for 30.3% of the CPI, had registered a growth of 3.2% YoY (May: +3.5%).

- As anticipated, the cost component of alcoholic beverages and tobacco experienced a significant uptick in its annual prices by 4.2% in June as British American Tobacco Malaysia had raised prices for all its cigarette brands by 30 sen per pack effective June 3. In May, this component cost had registered a price increase of 1.9%. Nonetheless, the overall price hike of cigarettes will have a limited impact on overall inflation for the full year due to its marginal contribution to CPI of 1.7%.

- On YTD basis, we note that inflation had increased by a modest 1.6%. Basically, prices of the non-food segment had risen by 0.9% YTD while the cost component of food and non-alcoholic beverages advanced by 3.3%.

- Pressures from global commodity prices are also likely to be contained given the moderate global growth prospects. The producer price index for the month of May suggests that cost of production has fallen for the last twelve straight months. In May, the producer prices slipped by 4.6% YoY (April: -4.9% YoY).

- Consumer prices are likely to stay in check considering that production cost remains weak. Thus, inflation growth in 2H13 will remain modest. In tandem with a stable output growth, we are maintaining our full-year inflation projection at 2.5% assuming one round of subsidies cut. However, without the cuts in subsidies this year, we do foresee prices to grow at a slower pace of 1.9% in 2013.

- As such, interest rate is likely to be retained at 3.0% for the rest of 2013 in tandem with the growth prospects and inflation expectations ahead. Particularly, price pressure is limited while the ongoing global challenges will continue to be a major drag on exports growth.

Source: AmeSecurities