Inflation picks up in October

• Inflation climbed by 0.6% yoy

• Higher transportation index; 0.8% yoy

• Core inflation grew by 0.4%

• Global inflation edged up slightly in October

• Inflation to trend up at a measured pace

Malaysia’s inflation climbed by 0.6% yoy in October following a 0.3% rise in the previous month. Although the CPI edged higher in October as compared to the last two months, it was still below 1.0%. The escalation of October’s CPI was mainly contributed by food and non-alcoholic beverages (FNAB) index (Oct: 1.2%; Sep: 0.5%) and transportation index (Oct: 0.8%; Sep: 0.3%). FNAB index which held 29.5% over total weightage of headline CPI surged above 1.0% after four consecutive months of sluggish growth since the zerorisation of GST in June. Food at home index picked up by 0.3% yoy in October after declining in the past two months (Sep: -0.7%; Aug: -0.4%). Meanwhile, food away from home expanded by 2.7% yoy in October, slightly higher than the previous month’s figure.

On a monthly basis, CPI rose by 0.2% in October and for the period Jan-Oct 2018, CPI registered a rise of 1.1% as compared to the corresponding period of last year.

Higher transportation index. The transportation index gained momentum in October and grew by 0.8% yoy after decelerating for three straight months (Sep: 0.3%; Aug: 2.1%; Jul: 6.7%). The increased in October was majorly contributed by higher fuel prices of RON97 and RON95 as compared with the corresponding period of last year. On average, the fuel price of RON97 surged by a double-digit growth of 12.7% yoy in October (Sep: 6.7%) whilst RON95 rose by 1.1% yoy (Sep: 0.5%). Although these two fuel prices showed a pick up in October, the price of Diesel continued to moderate further (Oct: 2.5%; Sep: 4.7%; Aug: 6.9%; Jul: 13.7%). On monthly basis, transportation index grew by 0.3% in October. The price of RON97 spiked by 5.3% mom to RM2.79 in October (Sep: RM2.65). On the other hand, there was no change on the fuel price of RON95 as well as diesel as it was fixed at RM2.20 and RM2.18 respectively.

Marginally higher core inflation. Core CPI - which excludes the most volatile items of fresh foods as well as administered prices of goods and services – was up by 0.4% yoy in October, marginally higher than 0.3% rise recorded in the preceding month. The increase was mainly supported by housing, water, electricity, gas & other fuels (+2.3%), food & non-alcoholic beverages (+1.3%), restaurants & hotels (+1.2%) and education (+1.1%).

States inflation was higher. In terms of overall CPI, four states surpassed the national CPI rate of 0.6% recorded in October 2018. The states were Wilayah Persekutuan Kuala Lumpur (1.3%), Negeri Sembilan (1.1%), and Selangor & Wilayah Persekutuan Putrajaya (0.8%) and Pulau Pinang (0.7%). Whereas, Johor registered the similar rate as the national CPI.

Meanwhile, the higher rise 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 (1.2%) in October. The index for FNAB rose 4.5% in Wilayah Persekutuan Kuala Lumpur, 1.6% in Negeri Sembilan and 1.4% in Selangor & Wilayah Persekutuan Putrajaya.

CPI for Urban and Rural. The urban CPI for October rose by 0.6% while rural increased 0.4% compared with the same month in 2017. As compared to the previous month, the CPI for urban and rural up 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 0.7% yoy and 0.2% mom.

Global inflation edged up slightly in October

Indonesia's annual inflation rate increased to 3.2% in October from an over-two year low of 2.9% in the previous month. Annual core inflation rose to a ten-month high of 2.9% from a three-month low of 2.8% in September. On a monthly basis, consumer prices went up 0.3%, after a 0.2% fall in September. Thailand’s CPI eased to a six-month low of 1.2% in October from 1.3% in the previous month. Consumer prices edged up 0.1% mom in October while core inflation increased by 0.7%. Philippine annual inflation came in at 6.7% in October, unchanged from the previous month. A faster rise in cost of housing and transport offset a slight slowdown in prices of food. The latest reading remained at its highest since February 2009. Singapore’s inflation stayed at 0.7% yoy in October, unchanged from August and September. In comparison, core inflation headed back higher to 1.9% yoy after briefly easing to 1.8% yoy in September.

Inflation in China stood at 2.5% yoy in October, unchanged from the previous month's sevenmonth high. A slowdown in prices of food was offset by a faster rise in cost of non-food products. For 2018, the Chinese government targets inflation to be around 3.0%. Annual core inflation, edged up to 1.8% in October from 1.7% in the previous month. On a monthly basis, consumer prices went up 0.2%, easing from a 0.7% advance in September.

US inflation rate increased to 2.5% yoy in October from 2.3% in September, mainly due to prices of fuel oil and gasoline. On a monthly basis, consumer prices increased 0.3%, higher than 0.1% in September, the highest monthly gain in nine months. Core inflation - which strips out food and energy - rose 0.2% mom and is up 2.1% yoy in October. The overall impression is that inflation remains in the moderate zone. The UK inflation rate was flat at 2.4% yoy in October, the same as in September. However, it is still above the Bank of England's (BoE) 2.0% target. The BoE expects inflation will drift lower, but expects to have to raise interest rates in coming years to keep inflation at or near its target figure. Consumer prices in European Union came in at 2.2% in October, slightly above 2.1% in the previous month. It was the highest inflation rate since December 2012 on rising prices of services, energy and industrial goods. Core inflation, at which the ECB looks in its policy decisions, increased to 1.1% yoy in October from 0.9% in September. Japan's inflation rate rose to 1.4% yoy from 1.2% in the previous month. It was the highest rate since February, mainly due to a jump in prices of food. Core inflation rate stood at 1.0%, unchanged from the previous month and remained the highest figure since February.

Inflation to trend up at a measured pace

Malaysia's consumer price index rose 0.6% yoy in October, accelerating from the previous month's 0.3% rise, as inflation picked up in five key sectors. This brought year-to-date inflation to an average of 1.1%. YTD Inflation was largely benign but is seen edging upwards for the rest of the year and into next year.

Going forward, inflation will likely rise next year at a measured pace and we expect it to be slightly lower than the government’s official forecast. The low base from 2018, coupled with the potential second order effects from the reintroduction of the Sales and Services Tax and higher minimum wages that was introduced in the most recent budget, could potentially push inflation higher 2019. Key risk for inflation will be in the second quarter of 2019 where the government plan of more targeted fuel subsidy scheme.

The new system to carry out the targeted RON95 fuel subsidy mechanism for lower engine capacity vehicles is expected to be rolled out in stages by the second quarter of 2019. According to Domestic Trade and Consumer Affairs Ministry the mechanism would be implemented in stages to allow the public to prepare itself as some would be eligible to receive the subsidy while others would not. Under Budget 2019, motorists using cars with engine capacities of 1,500cc and below, or motorcycles with engine capacities of 125cc and below, will enjoy RON95 petrol at a lower price. Eligible drivers can receive subsidies for up to 100 litres per month for cars and 40 litres per month for motorcycles.

As such, we maintain our full-year inflation targets at 1.4% for 2018 and 2.0%-2.5%% for 2019.

Source: BIMB Securities Research - 26 Nov 2018