• PPI picked up by 0.7% yoy and recovered by 0.3% mom

• Cost in manufacturing and agriculture, forestry & fishing continued to decrease in July

• The cost for crude materials for further processing increased by double-digit for second consecutive month.

• Inflationary pressure remains contained as moderating PPI trend continues

Malaysia’s PPI for local production in July picked up by 0.7% yoy from 0.1% registered in the previous month. It marked the second straight month of producer inflation, boosted by further rise in the costs of water supply by 0.3% yoy after falling 0.2% in June. The expansion was also supported by mining (+32.6%) and electricity & gas supply (+1.1%). However, agriculture, forestry & fishing (-11.5%) and manufacturing (-1.2%) showed a prolonged drop for 9th and 7th straight month respectively.

On monthly basis, PPI for local production increased 0.3% in July following 0.7% decline in the prior month. The increase was buttressed by all sectors except for agriculture, forestry & fishing (-1.6%); mining (+2.6%), manufacturing (+0.1), electricity & gas supply (0.4%) and water supply (+0.6%).

In terms of stage of processing (SOP), crude materials for further processing continued to post double-digit growth in July; 11.1% yoy following a 12.3% increase in the previous month. Same as last month, the cost for intermediate materials, supplies & components and finished goods still declining in July; -1.2% and -3.1% respectively.

On monthly basis, the increase in PPI for local production by SOP in July was contributed by crude materials for further processing (+0.1%) and intermediate materials, supplies & components (+0.5%). Meanwhile, the finished goods remain unchanged.

Inflationary pressure remains contained as moderating PPI trend continues

Malaysia's producer prices increased for the second straight month in July after cost inflation hovers in negative area for five consecutive months.

Although cost inflation continues to recover, input costs for the first seven months of this year remained low (Jan-Jul 2018: -1.0% yoy; Jan-Jul 2017: 8.4% yoy) and we believe that, this would provide support to industrial and business activities in the coming months. Looking at manufacturing activities, Malaysia’s Purchasing Managers Index (PMI) continues its upward trend in July as the PMI expanded marginally to a five-month high at 49.7 (June: 49.5). However, a weaker ringgit in July led to higher import costs and applying additional pressure on input prices faced by manufacturers. Still, we foresee Malaysia’s external trade performance as well as industrial productions to continue to expand on the back of low inflation. Eventually, this will translate into steady economy growth.

With the fixing of fuel prices and zero-rating of GST, prices of goods are expected to remain subdued before it starts picking up again towards the end of the year, in our view. We expect moderate pressure on inflation after the implementation of the SST though the transition will not deviate significantly from the ongoing weak inflation trajectory.

Going forward, we expect inflation to stay moderate, as producers’ cost inflation continues to remain low. These could hold down input cost pressure and indirectly support local industrial production.

Source: BIMB Securities Research - 3 Sept 2018