• Inflation moderated to 1.4% yoy, lowest since July 2016

• Petrol prices declined in February

• Core inflation eased to 1.8%

• China inflation rate at the highest since 2013

• The economy to be in positive real return in 2018

Malaysia’s inflation increased 1.4% yoy in February, after a 2.7% rise in the prior month. It was the lowest inflation rate since July 2016 (1.1%), mainly due to a slowdown in cost of food & non-alcoholic beverages and housing while prices of transport fell. Furthermore, housing, water, electricity, gas and other fuel which accounted 23.8% in the CPI weights registered slower growth of 2.0% yoy from 2.2%. Compared to the previous month, the CPI was flat (Jan: 0.3%). The overall index for food & non-alcoholic beverages (FNAB) which attributed 29.5% in the CPI weights, rose 3.0% in February (Jan: 3.8%). The increase in FNAB was driven by food at home (Feb: 2.3%; Jan: 3.4%), primarily fish & seafood, fruits, sugar, jam, honey, chocolate & confectionery and vegetables. Whilst, food away from home index grew by 4.3% in February from 4.9% in the prior month.

Petrol prices declined. The main factor that contributed to the slower CPI in February was the decline in the transport component owing to lower petrol prices. Transportation index declined 0.3% yoy in February. The last period which saw a negative growth for transportation index was in December 2016 (-0.6%). The declining growth was due to cheaper retail fuel prices and higher base-effect in 2017. Retail fuel prices for RON95 and RON97 declined in February. The average price of 1 litre of RON95 petrol dropped to RM2.26 in February 2018 (Jan 2018: RM2.29; Feb 2017: RM2.30). As for RON97, the average price decreased to RM2.53 in February 2018 (Jan 2018: RM2.56; Feb 2017: RM2.60). The average price of diesel in February 2018 was RM2.24 as compared to RM2.15 registered in the same period of last year (Jan 2018: RM2.32). Fuels & lubricants for personal transport equipment, which accounted for 8.5% of the CPI weights, rose 1.6% yoy in February from 8.5% in January 2017.

Core inflation lower. Core inflation, which excludes nine of the most volatile items of fresh foods as well as administered prices of goods and services, eased to1.8% yoy from 2.2% in January. Among the major groups which influenced the higher core rate were price increases of FNAB (3.1%), housing, water, electricity, gas & other fuels (2.4%), furnishings, household equipment & routine household maintenance (2.1%), health (2.1%), restaurants & hotels (1.8%), and transport (1.4%) and recreation services & culture (0.4%).

States inflation remains steady. In terms of overall CPI, four states surpassed the national CPI rate of 1.4% yoy recorded in February 2018. The states are Melaka (1.8%), Selangor & Wilayah Persekutuan Putrajaya (1.7%), Johor (1.5%), and Sabah & Wilayah Persekutuan Labuan (1.5%). The remaining states CPI were at par or lower than the national level index. Meanwhile, the higher increase in the index for Food & Non-Alcoholic Beverages (FNAB) was reflected in most states in Malaysia. Six states recorded higher increases for FNAB index above the national index level (3.0%) for February 2018. The index for FNAB rose 4.2% in Wilayah Persekutuan Kuala Lumpur, 3.9% in Sabah & Wilayah Persekutuan Labuan, 3.6% in Johor, 3.2% in Penang, 3.1% in Sarawak and 3.1% in Melaka.

CPI for Urban and Rural. The urban and rural CPI for February 2018 increased by 1.5% and 1.2% respectively compared with the same month in 2017. As compared to the previous month, the CPI for urban grew by 0.1% whilst rural declined 0.1% respectively.

CPI for Income Group Below RM3,000. The CPI for income group below RM3,000 recorded an increase of 1.5% yoy and no growth on monthly basis.

China inflation rate at the highest since 2013

US inflation up 2.2% yoy in February, following a 2.1% yoy rise in the previous month while the core CPI increased 1.8% yoy from a year earlier. The data indicate inflation is gradually picking up without any big acceleration.

UK CPI slowed to 2.7% yoy in February after posting 3.0% increase in the prior month. Whereas, the core inflation ticked lower in February, grew by 2.4% yoy, down from preceding month’s reading of 2.7%. The slowdown was triggered by the transport and food prices, which rose by less than a year ago. Eurozone inflation slightly lower in February, rose by 1.1% from 1.3% in the previous month, the lowest inflation rate since December 2016. China CPI quickened to 2.9% yoy in February, picking up from a 1.5% gain in January. It was the highest inflation rate since 2013 (Oct 2013: 3.2%).

Indonesia’s inflation rate eased to 3.2% in February, following an increase of 3.3% in the preceding month. Prices of food materials like poultry, chillies and vegetables have helped the inflation cool down. Thailand CPI moderated to 0.4% yoy in February from 0.7% in January. It was the lowest inflation rate since August 2017, as cost of non-food went up at a slower pace. Inflation in Philippines surged 4.5% yoy in February, hits new 3-year high. It was driven by the higher prices of food and drinks.

The economy to be in the positive real return in 2018

February’s CPI reaffirms a moderating inflation trend that started in mid-2017. The downshift has accelerated amid a high base effect when inflation spiked to 4.5% in Feb 2017. Moving forward, we foresee the slowdown in inflationary pressure will persist throughout the year. We maintain our full year inflation forecast of 2.5%-3.0% in 2018 due to (1) a stronger ringgit which will soften the cost of imports and transfer pricing; (2) firmer commodity prices and (3) base effect. At this juncture, we see more downside risks than upside risks to our inflation outlook.

Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.25% on 7 March following a 25bps hike on 25 January. Real policy rate has widened to +1.85% amid slower inflation. On that note, we expect the economy to be in the positive real return in 2018, after sitting in the negative region in 2017. We maintain our year-end OPR projection of 3.25% in 2018 unless there are upside surprises to growth and inflation as compared to our forecasts of moderating real GDP growth (2018: 5.3%) and easing inflation (2018: 2.5%-3.0%).

Source: BIMB Securities Research - 22 Mar 2018