• Inflation increased by 1.4% yoy

• Transportation index rebounded

• Core inflation grew marginally lower at 1.5%

• Upswing in regional inflation but lower in major economies

• Inflation to remain moderate in 2Q

Malaysia’s inflation edged up slightly to 1.4% yoy in April from 1.3% in the previous month. The modest inflation rate was reflected by the slowdown in the cost of food & non-alcoholic beverages which decelerated for fourth consecutive month. Nevertheless, cost of transport rebounded to 0.4% yoy in April after fell for two months in row. On monthly basis, the CPI was flat, after a 0.3% fall in March.

The overall index for food & non-alcoholic beverages (FNAB) which attributed 29.5% in the CPI weights, moderated to 2.6% in April from 2.8% in March. The slower growth in the FNAB index was triggered by food at home (Apr: 1.9%; Mar: 2.2%). The sub-group that caused the slowdown were fish & seafood, meat, vegetables, milk & eggs, fruits and oils & fats. Food away from home also eased to 3.7% yoy in April from 3.9% in the prior month.

Transportation index rebounded. Transportation index which impelled the higher inflation last year rebounded to 0.4% yoy in April after declining for two consecutive months (Mar: - 1.5%; Feb: -0.3%). Even though it shows an increase, it marked the lowest gain since Jun 2013 (0.3%). On monthly basis, transportation index registered no changes in April. This might be reflected by the petrol price in April 2018 which was unchanged throughout the month. The petrol prices for RON95, RON97 as well as Diesel remained at RM2.20, RM2.47 and RM2.18 respectively in April. As compared to April 2017, the average price of 1 litre of RON95 and RON97 were the same as April this year; RM2.20 and RM2.47 correspondingly. The average price of diesel in April 2018 was RM 2.18 as compared to RM2.14 posted in the same month of last year (Mar 2018: RM2.17)

Core inflation lower. Core inflation, which excludes the most volatile items of fresh foods as well as administered prices of goods and services, grew marginally lower at 1.5% yoy from 1.7% in March and reaching the lowest figure on record. Among the major groups which influenced the higher core rate were price increases of FNAB (2.8%), housing, water, electricity, gas & other fuels (2.4%), restaurants & hotels (2.2%), health (2.1%) and furnishings, household equipment & routine household maintenance (1.8%).

States inflation remains steady. In terms of overall CPI, three states outpaced the national CPI rate of 1.4% yoy registered in April 2018. The states were Wilayah Persekutuan Kuala Lumpur (1.9%), Selangor & Wilayah Persekutuan Putrajaya (1.6%) and Pulau Pinang (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. Three states recorded higher increases for FNAB index above the national index level (2.6%) for April 2018. The index for FNAB rose 4.4% in Wilayah Persekutuan Kuala Lumpur, 3.0% in Penang and 2.9% in Sabah & Wilayah Persekutuan Labuan.

CPI for Urban and Rural. The urban and rural CPI for April 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 show no changes while rural decreased by -0.1%.

CPI for Income Group Below RM3,000. The CPI for income group below RM3,000 recorded an increase of 2.5% yoy and 0.5% on monthly basis.

Upswing in regional inflation but lower in major economies

There was a slight uptick in Indonesia’s inflation as the CPI rose slightly to 3.41% in April from 3.40% in the previous month. Headline inflation remained stable last month as higher food prices was offset by lower housing prices component as well as slightly lower transport component as fuel prices were kept from being increased. Core inflation also came in marginally higher at 2.69% yoy as compared to March’s 2.67%. Thailand’s April inflation also edged up to 1.1% yoy, coming in higher than the 0.8% yoy recorded in March. Core inflation was 0.64% yoy, slightly higher than 0.63% yoy recorded in March. Consumer prices in the Philippines rose by 4.5% yoy in April, after a 4.3% gain in the previous month. It was the highest inflation rate since November 2011.

Japan's headline inflation eased to 0.6% yoy markedly from 1.1% in March. It is the lowest rate since last November, as food inflation eased to 5-month low and cost of transport increased less. Core inflation rate eased to 0.7% from 0.9% in March, the lowest figure since September 2017. China’s CPI rose at a slower pace of 1.8% yoy in the month of April, from 2.1% yoy a month ago. It was the lowest rate since January, mainly due to a sharp slowdown in food inflation. US inflation edged up to 2.5% from 2.4% in March. It is the highest rate since February of 2017 amid rises in gasoline, fuel and shelter cost. Core inflation was flat at 2.1%. On a monthly basis, consumer prices went up 0.2%, rebounding from a 0.1% drop in March

Inflation to remain moderate in 2Q

Inflation in April rose 1.4% yoy as steady fuel prices offset higher food costs. April's annual inflation rate was slightly higher than the 1.3% recorded in March. Headline inflation has moderated after staying above 3.0% every month last year, peaking at 5.1% in March 2017.

Higher base effect as well as the appreciation ringgit has helped to moderate the inflationary pressures. Smaller readings on core CPI suggest that the transmission from food and transport related prices to other prices are contained. With moderate inflation rate, savers have effectively earned positive real rates of return on their savings.

Bank Negara kept its policy rate unchanged in their recent policy review amid a wellbalanced risk between growth and inflation. Inflationary pressures have remained muted. Indeed, the high base last year has been one of the key reasons behind the benign inflation thus far. Besides, a stronger ringgit in the first three months has kept imported inflation at bay. We reckon that while inflation has bottomed, the upward shift is expected to be gradual.

The government announced that fuel retail prices will remain unchanged, despite global oil prices soaring to more than USD70 per barrel. Meanwhile, delivering one of its key promises in its manifesto, the GST will be removed from June onwards, which could see a one-off dip in inflation. But beyond the one-off impact from the GST, we reckon that inflation will likely rise gradually towards the end of the year. However, we are maintaining our full-year inflation forecast of 2.5%-3.0% in 2018. While BNM left interest rates unchanged, the outlook for monetary policy has been thrown into considerable uncertainty following the change in government. For now, we are maintaining our view that the OPR will remain on hold until the end of the year.

Source: BIMB Securities Research - 24 May 2018