• CPI rose 3.9% yoy but declined 0.2% mom

• Core inflation increased marginally at 2.6% yoy

• Global inflation eases in May

• Easing inflation should keep rates steady

Malaysia’s consumer price index (CPI) continued to grow at a moderate pace in May at 3.9% yoy from 4.4% recorded in April. In terms of year on year basis, the inflation rate in May 2017 was mainly contributed by the transportation index which stood at 13.1% followed by food and non-alcoholic beverages index (4.4%). However, compared to April 2017, headline inflation rate declined 0.2% mom as the transportation index dropped -3.2% in May. It registered the third month of negative growth since March (Apr 2017: -1.9%; Mar 2017: -0.3%). The index for food and non-alcoholic beverages which accounted 30.2% in the CPI weights rose slightly higher in May at 4.4% yoy as compared to 4.1% reported in the previous month. The increase in May 2017 was fuelled by food sub-group which consist of oils and fats sub-group (+38.9%), fish & seafood (+7.7%), meat (+5.1%), fruits (+3.3%) and vegetables (+0.8%).

The index of transport group increased 13.1% yoy in May 2017, after a significant 16.7% upsurge in April 2017. The transport group index low base effect in May 2016 and the rise in fuel prices were the main catalysts for the higher growth of the transportation index in May 2017. The average price of 1 litre of RON95 petrol was RM2.09 in May 2017 (May 2016:RM1.70; Apr 2017:RM2.21; Mar 2017: RM2.29). As for RON97, the average price increased to RM2.37 in May 2017 (May 2016:RM2.05; Apr 2017:RM2.48; Mar 2017:RM2.59). Fuels & lubricants for personal transport equipment accounted for 7.8% of the CPI weights.

Core inflation marginally higher. Core inflation rose marginally higher at 2.6% in May 2017 as compared to the same month of the preceding year. Among the major groups which influenced the higher core rate were price increases for food & non-Alcoholic beverages (+4.2%), transport (+3.1%), recreation services & culture (+2.9%), health (+2.9%) and housing, water, electricity, gas & other fuels (+2.7%).

Six states registered higher increases for FNAB index above the national level index for May 2017 compared to the corresponding month in 2016. The index for FNAB rose in Melaka (5.7%), Pulau Pinang (5.1%), Johor (5.0%), Wilayah Persekutuan Kuala Lumpur (4.9%), Kedah & Perlis (4.8%) and Selangor & Wilayah Persekutuan Putrajaya (4.7%). On monthly basis, the index for FNAB rose 0.5% in May 2017, after increased 0.3% in April 2017. Meanwhile, the index for non-food fell in April 2017 (-0.5%) compared with the last month.

CPI Changes by States. Seven states recorded higher CPI increases above the national level index for May compared to the same month in 2016. The seven states were Melaka (4.4%), Negeri Sembilan (4.4%), Pulau Pinang (4.4%), Johor (4.3%), Kedah & Perlis (4.2%), WP Kuala Lumpur (4.2%) and Selangor & Wilayah Persekutuan Putrajaya (4.0%). 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 May 2017 increased by 4.0% and 3.8% respectively compared with the same month in 2016. As compared to the previous month, the CPI fo 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 3.7% yoy but declined 0.1% mom.

Global inflation eases in May

US consumer price index edged down by 0.1% mom in May after rising by 0.2% in April. Consumer prices in May were up by 1.9% yoy, a deceleration from the 2.2% increase seen in April. The annual rate of growth in core consumer prices also slowed to 1.7% in May from 1.9% in the previous month. Eurozone inflation slowed in May, largely reflecting the slowdown in energy price growth. Headline inflation eased to 1.4% from 1.9% in April. Core inflation, which excludes energy, food, alcohol & tobacco, dropped to 0.9% from 1.2%. On a monthly basis, the harmonized index of consumer prices (HICP) dropped 0.1% in May. Meanwhile, the rising cost of foreign package holidays and imported computer games helped to push the UK inflation rate up to 2.9% in May from 2.7% in April. The latest inflation rate is the highest since June 2013, and above the Bank of England's 2% target. China's consumer prices rose 1.5% yoy in May of 2017, following a 1.2% rise in April. It was the highest inflation rate since January, as cost of non-food increased further and cost of food fell much less than in a month earlier. On a monthly basis, consumer prices declined by 0.1%, after gaining 0.1% in a month earlier As for the ASEAN, Indonesia's inflation increased to 4.3% yoy in May from 4.2% in April. On a monthly basis, consumer prices advanced only 0.4%. Core inflation came in at 3.2% in May. Consumer prices in Thailand edge down 0.04% yoy in May of 2017, from a 0.38% in April. The core inflation rate eased to 0.46% following 0.50% in April. Consumer prices in Singapore rose 0.4% yoy in April of 2017, following a 0.7% increase in March. Core consumer prices went up 1.7%, faster than a 1.2% gain in the prior month. It was the highest core inflation rate since October 2014. On a monthly basis, consumer prices fell 0.3%, compared to a flat reading in March. Philippines inflation decelerated to 3.1% in May 2017 while core inflation rate slowed to 2.9% from 3.0% in April. On a monthly basis, consumer prices edged up 0.1%, compared to 0.2% gain in the prior month.

Easing inflation should keep rates steady

Inflation eased further with headline CPI moderated to 3.9% yoy, from 4.4% in the previous month. With slower May CPI, this affirms our initial thoughts that inflation is believed to have peaked in March and is expected to ease steadily over the course of the year. Transport inflation remained the key driver, posting an increase of 13.3% yoy in May. However, this is down from 16.7% in the previous month. Indeed, the softer transport inflation arising from the decline in domestic pump prices is the main reason for the dip in inflation. Based on current fuel prices in first half of June, the transportation component should ease further which could pave the way for lower headline inflation. However food prices could rear higher with the Ramadhan fasting period and Aidilfitri in June. Plainly, inflation will ease while growth should remain fairly stable. With global crude oil prices retreating to 7-month lows amid stable ringgit, cost driven inflation pressures should abate. If the bearish oil trend sustains, it could tilt the inflation trajectory even lower. While the higher inflation has pushed real policy rates to negative, Bank Negara has maintained the Overnight Policy Rate at 3.0% in recent meetings. Despite core inflation was slightly higher at 2.6% in May following three consecutive months of stable core inflation (2.5%), of note, core inflation has remained below policy rate year-to-date and headline inflation is also expected to ease. Growth has been buoyant and will be within the official forecast range of 4%-5%. Moving forward, upside risks to watch include food prices, new tourism tax imposed on hotel accommodation and potential subsidy rationalisation measures although we expect inflation to still remain within the central bank’s comfort zone. 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. We expect headline inflation to have peaked in March and average 3.6% this year, in line with BNM’s inflation outlook of 3.0%-4.0% in 2017. With that, we continue to expect Bank Negara to keep the OPR at 3.0% for the rest of the year.

Source: BIMB Securities Research - 22 Jun 2017