• Inflation grew by 0.9%

• Higher transportation index

• Core inflation declined 0.2%; the first negative growth ever recorded

• An uptick in global inflation

• Paring down our inflation estimate from 2.0% to 1.4%

Malaysia’s inflation grew marginally at 0.9% yoy in July following 0.8% rise in the previous month, the first month after the zerorisation of good and services tax (GST) rate. The slight increase in July was mainly due to declining price in certain major indices as well as the slowdown in food and non-alcoholic beverages (FNAB) index which held 29.5% over total weightage of headline inflation (Jul: 0.7%; Jun: 0.8%). In contrast, the transport index accelerated further to 6.7% yoy in July following a 5.5% rise in June. It was the highest increase since December 2017.

On a monthly basis, CPI rose by 0.2% (Jun: 1.2%) and for the period Jan-Jul 2018, CPI registered an increase of 1.4% as compared to the corresponding period of last year.

Higher transportation index. The transportation index continued to grow at a faster pace in July, expanded by 6.7% from 5.5% posted in the previous month. It was the highest growth since December 2017 (11.5%). Again, the higher retail fuel prices were the major catalyst for the expansion. On average, the fuel price for RON 95, RON 97 and Diesel increased by 13.4% yoy, 16.5% yoy and 13.7% yoy respectively. On monthly basis, transportation index remained unchanged after falling 0.8% in June. In July 2017, the average RON 95 fuel price was at RM1.94/litre, lower than June 2017’s RM2.01/litre. Whilst in July 2018, RON 95 prices remained fixed at RM2.20/litre since March and will stay at the current price level after being subsidized by the government. Likewise, the price of diesel will also remain at RM2.18/litre. In contrast, the price of RON97 would be subjected to a free float according to the market price and the price was at RM2.56/litre in July 2018 as compared to RM2.58/litre in the prior month; fell by -0.9%.

Negative core inflation. Core CPI - which excludes the most volatile items of fresh foods as well as administered prices of goods and services – declined for the first time since data began in January 2015 by -0.2% yoy, suggesting that demand-driven inflationary pressure remains contained amid the lack of persistent tightness in capital stock and wage pressures. The decrease was pulled down by these indices; communication (-3.9%), clothing and footwear (-3.0%), miscellaneous goods and services (-3.0%), recreation services and culture (-2.4%) and transport (-1.7%). Besides that, the major group which give higher influenced to the core rate; FNAB moderated to 0.8% yoy from 1.0% in June.

States inflation was slower. In terms of overall CPI, four states surpassed the national CPI rate of 0.9% recorded in July 2018. The states were Negeri Sembilan (1.3%), Selangor and Wilayah Persekutuan Putrajaya (1.2%), Wilayah Persekutuan Kuala Lumpur (1.1%) and Johor (1.0%). The remaining states’ CPI was 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. Two states recorded higher increases for FNAB index above the national index level (0.7%) in July. The index for FNAB rose 3.5% in Wilayah Persekutuan Kuala Lumpur and 0.9% in Sarawak.

CPI for Urban and Rural. The urban and rural CPI for July 2018 increased by 0.9% compared with the same month in 2017. As compared to the previous month, the CPI for urban and rural rose by 0.2% and 0.1% respectively.

CPI for Income Group below RM3,000. The CPI for income group below RM3,000 recorded an increase of 1.2% yoy and unchanged on mom.

An uptick in global inflation

Singapore's inflation rate came in at 0.6% yoy in July unchanged from June’s 7-month high. Food inflation was steady while housing deflation eased and transports prices fell. However, core inflation - that excluded the costs of accommodation and private road transport - increased by 1.9% yoy, highest level in nearly four years since August 2014. The largest price increase in July was from the electricity & gas segment, registering a 12.7% yoy rise, compared to the 3.7% yoy growth in June. This was due to the upward revision in electricity tariffs that started in July due to the pickup in global oil prices in 2Q18. Philippine’s inflation jumped to fresh high at 5.7% yoy in July as compared to June’s 5.2%. Philippine central bank maintaining expectation that inflation will return to target of 2%-4% by 2019. Thailand’s inflation for July edged higher to 1.5% yoy, from 1.4% yoy. Core inflation, on the other hand, remained at 0.8%. Indonesia’s inflation rate picked up pace slightly in July at 3.2% yoy as compared to 3.1% yoy in June 2018. Core inflation rose to 2.9% in July from 2.7% in June.

China's inflation rose to a four-month high of 2.1% yoy in July from 1.9% in the previous month. Still, inflation remained well below the Chinese government’s target of around 3.0% for 2018. Core inflation, which excludes volatile items such as food and energy, stood at 1.9% in July, the same as in the previous two months. Consumer prices in Japan were up 0.9% yoy in July, up from 0.7% in June. Core CPI, which excludes volatile food prices, advanced 0.8%, unchanged from the previous month. Eurozone inflation accelerated for a third straight month in July to 2.1% yoy, after climbing 2.0% in June. The latest inflation figure was the highest since December 2012. Thus, inflation has exceeded the European Central Bank's target of "below, but close to 2 percent" for a second month in a row. Core inflation, excluding energy, food, alcohol and tobacco, accelerated to 1.1% in July from 0.9% in June. Inflation rate in the US stood at 2.9% yoy in July, unchanged from the previous month. Still, inflation remained at its highest level since February 2012. Core inflation, which excludes food and energy, rose to 2.4% yoy in July from 2.3% in June. It was the highest rate since September 2008. Inflation in the UK rose to 2.5% yoy in July from a year low of 2.4% in the previous month, marking the first time since last November that inflation has gained pace. Core inflation rate, which excludes prices of energy, food, alcohol and tobacco, stood at 1.9% in July, the lowest since March 2017.

Paring down our inflation estimate from 2.0% to 1.4%

Malaysia's headline inflation rose 0.9% yoy in July, up marginally from the 0.8% recorded in June. June's inflation rate was the lowest in three years. Headline inflation slowed to 1.3% in 2Q18 and is expected to moderate further throughout the year. Overall, inflation averaged 1.5% yoy in the first seven months of 2018. The lack of inflationary pressure could be attributed to the base effect as well as the effects from the tax holiday period following the abolishment of the GST and the stable fuel pump prices.

The GST, which was introduced in April 2015 to shore up the fiscal position, will be replaced by the Sales and Services Tax (SST). Although the reintroduction of the SST in September could drive inflation higher, the effects on prices are expected to be less than the GST. Nevertheless, while prices are sticky downwards during the zero-tax holiday period, the effect may not be the same when SST comes into effect as business may adjust the prices upwards instead.

Following the tax holiday window in June-Aug, introduction of SST 2.0 in Sept, as well as lower food inflation pressure, inflation is likely to average sub-1% in 3Q18 before the SST kicks in to lift it higher in 4Q18. This should translate into overall inflation of 1.4% for the full year, down from our previous forecast of 2.0%.

Growth momentum to slow further in 2H18. So far, the post GE14 period brought a mix impact on economic growth. Higher private consumption growth following the government’s decision to scrap the GST has so far been positive on growth. But lower fiscal spending and weak external demand continue to have opposite effect. This has resulted in the 1H18 GDP moderated to 4.9% yoy. On the expectation that the growth momentum to slow further in 2H18 due to the impact of a weaker global trade because of the impact of trade war and further slowdown in domestic demand we are projecting economic growth to moderate to 4.7% in the 2H18. Hence, we revised our 2018 GDP growth forecast to 4.8% from 5.3%. However, we are not too disturbed with the lower GDP outlook as growth will continue to be supported by domestic activities and exports.

Monetary policy bias to remain accommodative. Headline GDP growth will likely continue to ease in the coming quarters. Domestic growth momentum will also moderate with an anticipated easing in investment activity due to cancellation of several infrastructure projects. Coupled this with a benign inflation outlook, Bank Negara is certainly in no hurry to tighten monetary policy further. In fact, the prospect of further slowing of GDP growth may be of more concern and raise the probability of a rate cut going forward. However, we believe BNM’s pro-growth policy leaning remains dominant as lingering policy uncertainties and some macro risks may still pose a risk to capital outflows. Hence, we expect the monetary policy to remain accommodative, implying the OPR will remain unchanged at 3.25% with the full-year inflation hovering around 1.4%.

Source: BIMB Securities Research - 27 Aug 2018