-  Malaysia’s Consumer Price Index (CPI) advanced further to +2.9% YoY in November, which is in line with both our and consensus expectations of 2.9%. On a YTD basis, inflation grew by 2.0%.

-  Specifically, core inflation advanced by 2.5% YoY while the cost component of Food and Non-alcoholic Beverages had increased by 3.9% during the month.

-  In particular, transport cost has increased by 4.9% YoY on the back of higher fuel cost effective September 2013. Note that the transport index accounts for 14.92% of overall CPI.

-  Inflation will likely remain elevated in December due to higher transport cost and soaring food prices. Our estimate suggests an overall price increase of 3.1% in December which brings full year inflation to 2.1% in 2013.

-  Prices are expected to rise in 2014 as subsidies are gradually rationalised. We foresee further price rationalisation amounting to RM3.5bil next year.

-  In part, RM1.7bil in government savings could potentially come from another round of petrol pump price increase during the middle of 2014.

-  Currently, total savings from the petrol pump price adjustment and abolishment of sugar subsidies amount to approximately RM3.8bil in 2014.

-  Inflation will escalate and could even surpass 3.2% during some months in 2014 as the government reduces fuel subsidies in tandem with its fiscal consolidation efforts.

-  However, modest economic growth and stable external price environment would in some ways buffer the impact of fuel subsidy cuts going forward.

-  We expect full-year CPI to grow by 3.0% in 2014. Our estimates take into account a one-time increase in petrol pump prices by 20 sen in mid-2014.

-  Meanwhile, various news reports have quoted Works Minister Datuk Fadillah Yusof as saying that the toll concession agreements were up for a review. Nonetheless, the Works Ministry has not finalised its rates on selected highway tolls.

-  However, if toll rates are reviewed, transport cost will escalate and headline inflation will be even higher than our current projection.

-  Base on our estimate, an average of 5% increase in the transport index effective mid-2014 will raise inflation by another 0.3ppt during 2014.

-  All in all, higher cost pressure for an extended period coupled with strong demand could trigger an interest rate hike in 2014. We anticipate an increase in interest rate by 25bps in the coming fiscal year, thus bringing OPR to 3.25% by the end of 2014.

Source: AmeSecurities