- Malaysia’s Consumer Price Index (CPI) advanced by 3.4% YoY in April compared to our and consensus expectations of 3.3% and 3.5% YoY respectively (March: +3.5% YoY).

- Specifically, core inflation grew by 3.3% YoY while the cost component of Food and Non-alcoholic Beverages increased by 3.6% during the month.

- Note that the transport index surged by 5.3% YoY while Housing, Water, Electricity, Gas & Other Fuels increased by 3.6% YoY.

- With that, inflation soared by 3.5% YTD. The increase was driven by the Food & Non-Alcoholic Beverages and Non- Food index, which advanced by 3.9% and 3.3% YTD, respectively.

- We anticipate further reduction in petrol subsidy in mid-2014 as the government plans to reduce overall spending on subsidies.

- With that, monthly headline inflation will likely soar further during the middle of this year before prices ease towards the later part of 2014.

- In terms of percentage contribution, note that the transport index accounts for 14.9% of total CPI. As such, adjustment in petrol pump prices will significantly impact overall inflation.

- Owing to the YTD increase in prices and also our anticipation of further price hikes for the transport segment going forth, we take this opportunity to fine-tune our full-year CPI growth assumption.

- We are raising our full-year CPI growth estimate by 0.3ppt to 3.3% for 2014 (2013: +2.1%). Note that BNM had recently guided that Malaysia’s headline inflation is expected to average between 3% and 4% in 2014.

- BNM will continue to focus on ensuring sustainable economic growth in a stable price environment while avoiding the build-up of financial imbalances.

- Considering the resilient economic growth in 1Q14 and the elevated price pressure, BNM could potentially raise interest rate by 25bps to 3.25% during the upcoming policy meeting.

- The Monetary Policy Committee of BNM will commence with the policy meeting on July 10.

Source: AmeSecurities