• CPI moderated to 3.4% yoy and rebounded to 0.7% mom

• Core inflation rose 2.2%

• Global inflation remains stable

• Inflation forecast remains at 3.9% for 2017

Malaysia’s consumer price index (CPI) moderated further to 3.4% yoy after 3.7% increase registered in the preceding month. This was mainly due to a slower increase in transportation costs (Nov: 10.8%; Oct: 12.1%) while prices of F&B also eased as the index for food and non-alcoholic beverages (FNAB), which accounted for 30.2% in the CPI weights, rose 4.0% in November (Oct: 4.4%). On monthly basis, headline inflation increased 0.7% from -0.2% in October, mainly driven by the FNAB index (Nov: + 0.4% mom; Oct: -0.5%) and also transportation index (Nov: +3.3%; Oct: -0.2%). CPI for the period January-November 2017 registered an increase of 3.9% yoy, mainly due to an increase in the food and non-alcoholic beverages index (+4.3%).

The transportation index remains as the major contributing factor of the increase in the CPI for November. Nevertheless, the annual growth of transportation index decelerated for the second consecutive month (Nov: 10.8%; Oct: 12.1%; Sep: 15.8%). The average price of 1 litre of RON95 petrol was RM2.30 in November 2017 (Nov 2016: RM1.95; Oct 2017: RM2.18; Sep 2017:RM2.19). As for RON97, the average price increased to RM2.59 in November 2017 (Nov 2016:RM2.30; Oct 2017: RM2.48; Sep 2017:RM2.48). The average price of diesel in November 2017 was RM2.22 as compared to RM1.90 registered on the same period of last year (Oct 2017: RM2.13; Sep 2017: RM2.08). Fuels & lubricants for personal transport equipment accounted for 7.8% of the CPI weights. At the same time, the cost of FNAB slowed to 4.0% in Nov from 4.4% in Oct and compared to 4.6% in Sep. The lower inflation in November was on account of a slower increase in the costs of food at home, mainly meat, vegetables and oils & fats, but partly mitigated by a jump in fish & seafood prices. Likewise, prices of miscellaneous goods & services, housing, water, electricity, gas & other fuels and healthcare declined at a faster pace in November, while prices of clothing & footwear and furnishing & household equipment eased during the month.

Core inflation slightly lower. Core inflation, which excludes nine of the most volatile items of fresh foods as well as administered prices of goods and services, inched lower to 2.2% in Nov from 2.3% in Oct. Among the major groups which influenced the higher core rate were price increases for FNAB (+3.6%), restaurants & hotel (+2.8%), housing, water, electricity, gas & other fuels (+2.6%), furnishings, household equipment & routine household maintenance (+2.5%), health (+2.2%) and transport (+2.2%).

States inflation remains steady. Inflation rate across all states declined in November, recording similar trend with national inflation. Five states recorded higher CPI increases above the national level index for November compared to the same month in 2016. The five states were Melaka (3.9%), Johor (3.8%), Selangor & WP Putrajaya (3.7%), Negeri Sembilan (3.7%) and Kedah & Perlis (3.5%). Meanwhile, the remaining states have recorded an increase at par or lower than the national level index. Five states registered higher increases for FNAB index above the national level index for November 2017 compared to the corresponding month in 2016. The index for FNAB rose in Johor (4.7%), Wilayah Persekutuan Kuala Lumpur (4.6%), Melaka (4.4%), and Kedah & Perlis (4.3%) and Selangor & WP Putrajaya (4.1%). On monthly basis, the index for FNAB increased 0.4% in November, after declined by -0.5% in October 2017. Meanwhile, the index for non-food rose in November 2017 (0.8%) compared with last month.

CPI for Urban and Rural. The urban and rural CPI for November 2017 increased by 3.5% and 3.3% respectively compared with the same month in 2016. As compared to the previous month, the CPI for urban and rural grew by 0.6% and 0.7% respectively.

CPI for Income Group Below RM3,000. The CPI for income group below RM3,000 recorded an increase of 3.2% yoy and up 0.6% mom.

Global inflation remains stable

Consumer prices in the US increased to 2.2% yoy in November from 2.0% in the previous month. Core inflation rate fell to 1.7% from 1.8% in October. Core inflation experienced significant deceleration since the beginning of the year. In January 2017, it was running at 2.3% yoy.

Eurozone consumer price inflation rose slightly to 1.5% yoy in November, following October's 1.4% increase. Nonetheless, inflation continues to stay well below the ECB's target of “below, but close to 2 percent”. Core inflation held steady at 0.9% in November. The UK's inflation rose to 3.1% yoy in November as the squeeze on households continued. It was the highest inflation rate since March 2012. The annual core inflation rate stood at 2.7% in November, unchanged from the previous month. The rate remained at the highest level since December 2011.

China's inflation rose 1.7% yoy in November, after a 1.9% rise in October. Meanwhile, consumer prices in Japan rose 0.2% yoy in October, following a 0.7% increase in the prior two months. It was the lowest inflation rate since March.

Consumer prices in the Philippines rose 3.3% yoy in November of 2017, the lowest inflation rate since August. Core consumer prices also went up 3.3% a year earlier from 3.2% gain in the prior month. Thailand’s headline inflation rose slightly to 1.0% yoy in November, bringing the year-to-date average headline inflation to 0.7% and still below target set by the BoT is 2.5%. The core inflation also rose 0.61% from a year earlier in November, after rising 0.58% in October.

On the other hand, Indonesia’s inflation rate continues to slow in November, edging lower to 3.3% yoy while core inflation follow suit at 3.0% yoy.

Inflation forecast remains at 3.9% for 2017

Inflation dips to 3.4% yoy, from 3.7% previously. It was mainly due to base effects at play although inflation has indeed been easing since the peak of 5.1% in March.

We expect headline inflation to moderate further on account of stable fuel prices, while the stronger forecast for the ringgit would translate into lower import prices. Core inflation remains stable but more likely to be sticky upwards amid robust domestic demand. Official projections point to lower inflation from 3%-4% in 2017 to 2.5%-3.5% in 2018, in line with our expectations of 3.9% in 2017 and 2.5%-3.0% in 2018.

The milder CPI gain in coming months is unlikely to deter Bank Negara Malaysia (BNM) from normalising interest rates next year. Rhetoric from the central bank has suggested that a tightening move is on the cards in 2018 when it stated in its last policy review in November that it may consider reviewing the current degree of monetary accommodation.

Source: BIMB Securities Research - 21 Dec 2017