• CPI rose 4.4% yoy but declined 0.3% mom
• Core inflation remained at 2.5% yoy
• Moderating inflationary pressures for most economies
• Heightened but manageable inflation

Malaysia’s consumer price index (CPI) slowed down in April after three consecutive months of acceleration. The CPI grew 4.4% yoy in April but at a slower rate compared with 5.1% significant increase in March. Inflation rate in April was driven by higher prices of food and non-alcoholic beverages and transportation cost. Compared to March 2017, headline inflation rate dropped 0.3% on both, monthly and seasonally adjusted term.

The index for food and non-alcoholic beverages which accounted 30.2% in the CPI weights was stable at 4.1% in April 2017. The index continued being a main contributor of the CPI growth. The increase was driven by food sub-group which comprised of oils and fats (+39.1%), fish & seafood (+6.2%), meat (+4.2%), fruits (+2.4%) and vegetables (+2.3%).

The index of transport group increased 16.7% yoy in April 2017, after a significant 23.0% increased in March 2017. The transport group index low base effect in April 2016 and the rise in fuel prices were the contributing factor for the higher growth of the transportation index in April 2017. The average price of 1 litre of RON95 petrol was RM2.21 in April 2017 (Apr 2016:RM1.70; Mar 2017:RM2.29; Feb 2017: RM2.30). As for RON97, the average price increased to RM2.48 in April 2017 (Apr 2016:RM2.05; Mar 2017:RM2.59; Feb 2017: RM2.60). Fuels & lubricants for personal transport equipment accounted for 7.8% of the CPI weights.

Core inflation stabled. Core inflation remained stable at 2.5% in April 2017 compared to the same month of the previous year. Among the major groups which influenced the higher core rate were price increases for food & non-alcoholic beverages (+4.1%), recreation services & culture (+3.0%), transport (+3.0%), health (+2.8%) and housing, water, electricity, gas & other fuels (+2.7%).

The index for food & non-alcoholic beverages (FNAB) which accounted 30.2% in the CPI weights maintained at 4.1% in April 2017 (Mar: 4.1%; Feb: 4.3%). Six states registered higher increases for FNAB index above the national level index for April 2017 compared to the corresponding month in 2016. The index for FNAB rose in Melaka (5.4%), Johor (4.8%), Wilayah Persekutuan Kuala Lumpur (4.7%), Kedah & Perlis (4.7%), Selangor & Wilayah Persekutuan Putrajaya (4.6%), and Pulau Pinang (4.6%).

On a monthly basis, the index for FNAB increased 0.1% in April 2017, after declining 0.3% in March 2017. Meanwhile, the index for non-food dropped in April 2017 (-0.4%) compared with the preceding month.

CPI Changes by States. Five states recorded higher CPI increases above the national level index for April compared to the same month in 2016. The six states were Johor (5.0%), Negeri Sembilan (4.9%), Kedah & Perlis (4.7%), Melaka (4.7%), and WP Kuala Lumpur (4.5%). Meanwhile, the remaining states have recorded an increase at par or lower than the national level index.

CPI for Urban and Rural. The urban and rural CPI for April 2017 increased by 4.4% and 4.3% respectively compared with the same month in 2016. As compared to the previous month, the CPI for urban and rural decreased by 0.2% and 0.3% respectively. CPI for Income Group Below RM3,000. The CPI for income group below RM3,000 recorded an increase of 4.1% yoy but declined 0.2% mom.

Moderating inflationary pressures for most economies

US inflationary pressures eased for a third month a row in April with headline CPI printing at 2.2%, and the core inflation moving below the 2.0% threshold to 1.9%, the smallest gain since October 2015. However, on monthly basis the headline inflation ticked up to 0.2% in April after a deceleration of 0.3% mom in March. April’s reading was the highest since January 2017. On the other hand, UK consumer prices jumped to 2.7% in April, the highest level since September 2013. China's inflation accelerated to a 3-month high in April. Inflation rose to 1.2% in April from 0.9% in March but it remained well below the government's target of around 3.0% for the whole year of 2017, giving it room to continue with a gradual pace of monetary policy tightening without hurting economic growth.

Meanwhile, inflation in most of ASEAN economies moderated in April. Malaysia recorded the highest inflation rate in the ASEAN region in April. Philippine annual inflation was unchanged at 3.4% in April while core inflation was 3.0% in April, picking up slightly from 2.9% the month before. Thailand’s headline and inflation surprised on the downside yet again as both headline and core inflation declined in April. The headline inflation rose 0.4% yoy in April of 2017, easing from a 0.8% increase in March while core inflation pulled back to 0.5% yoy, the lowest print in seven years. The contraction in food prices further weakened the headline number. Underlying inflationary pressures are still weak despite the stabilisation in economic activity. The CPI in Indonesia accelerated to the fastest pace in 13 months in April as administered price showing its effect despite of relatively stable food prices. Consumer prices in Indonesia rose 4.2% yoy in April of 2017 compared to a 3.6% gain in the previous month.

Overall, the elevated inflation rate level recorded across the region was due to higher in global commodities prices, while we opine contributed by partly by improving demand.

Heightened but manageable inflation

The consumer price index grew by 4.4% in April (Mar: 5.1%; 1Q17: 4.3%), largely from transportation sector inflation given higher oil prices since last year. We reckon that inflation is likely to remain elevated for 2Q17 and 3Q17 largely from the lower base effect of 2016. However, despite higher inflation, we believe that the broader price trends remain under control with core inflation largely unchanged at 2.5% yoy in April, suggesting that broader price trends remain intact. Furthermore, we believe that oil prices have stabilised somewhat and could be in the range of USD50-55/barrel area. We opine the effect of fuel prices will lapse off in the coming months as weekly fuel price mechanism may reduce volatility in consumer’s price expectations. This implies that inflation may have peaked in March. After March last year, retail fuel prices were hiked almost consistently for the rest of the year and the base effect is going to be quite significant in bringing down the monthly inflation number all the way to the end of the year.

In the latest MPC meeting, Bank Negara pointed out that “the increase in inflation reflected mainly the pass-through impact of higher global oil prices and temporary supply disruptions that led to higher food prices”. BNM expects the higher headline inflation to moderate in the second half of the year though the trend will be dependent on global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, is expected to increase only modestly.

In the first quarter of the year, headline inflation rose by 4.3% yoy (1.7% yoy in 4Q16), mainly attributed from higher cost of transport on improvement in global oil price as compared to last year. We also believed that headline inflation has already reached its peak in the month of March, where it surged to 5.1% yoy. Core inflation, which excludes volatile items and administered prices of goods and services stayed moderate at 2.4% averaged in 1Q17. The headline inflation continues to be volatile due to the floating retail pump price mechanism.

As such, going forward, we believe BNM’s monetary policy making decisions may not be based only on headline inflation, but also on the core inflation as one of the key price indicator in deciding the direction of BNM’s monetary policy. As the core inflation remains stable at the moment, we do not foresee the possibility of a tightening in the monetary policy this year. For full-year 2017, we are projecting headline inflation to average around 3.6% (2.1% in 2016). As for the direction of policy rate ahead, we believe that BNM will likely leave its OPR unchanged at 3.0%, possibly throughout 2017.

Source: BIMB Securities Research - 18 May 2017