• PPI dropped by -0.2% yoy and increased by 1.2% mom
• Reducing production cost in manufacturing and agriculture, forestry & fishing triggered the deflation in September
• The cost for intermediate materials, supplies & components and finished goods dropped further in September
• The CPI trend in tandem with movement of PPI

Malaysia’s producer price index (PPI) for local production contracted for the second consecutive month at -0.2% yoy in September following a 0.3% decrease in the previous month. The deflation in production cost was dragged mainly by manufacturing sector which attributed 81.57% of the total PPI. The cost of production in manufacturing sector had declined since Jan 2018 and in September it contracted by -1.7% yoy the same as in August. Likewise, agriculture, forestry & fishing index has been declining for 11 months in row and recorded a double-digit decline for fourth consecutive months (Sep: -16.4%; Aug: -13.2%; Jul: 11.5%; Jun: -10.1%). On the other hand, the production cost in mining surged by 28.9% yoy in September from 28.6% recorded in the prior month.

On monthly basis, PPI for local production was up by 1.2% in September from 0.1% decrease in the previous month. The rise in September was supported by manufacturing (+0.3%), mining (+10.3%) and water supply (+0.2%).

In terms of stage of processing (SOP), the cost for intermediate materials, supplies & components and finished goods dropped further in September; -1.5% and -2.7% respectively. The former hold 56.12% over total PPI while the later contributed 27.47%. Thus, the huge weightage attributed by these two categories will mainly determined the overall PPI which fell by -0.2%. In contrast, the cost of crude materials for further processing rose by 7.1% yoy in September after increasing by 7.2% in a month before.

On monthly basis, the increase in PPI for local production by SOP in September was contributed by all segments; intermediate materials, supplies & components (+0.3%), finished goods (+0.8%) and crude materials for further processing (+4.1%).

The CPI trend in tandem with movement of PPI

Producers’ cost inflation continues to remain low and as a leading indicator of price changes at the consumer level, the latest PPI number suggests that consumer price inflation will remain modest. Moving forward, we foresee overall PPI will rise modestly underpinned by strong pick-up in global crude oil prices, weaker ringgit and implementation of SST.

Source: BIMB Securities Research - 1 Nov 2018