• PPI recovered by 0.7% yoy and grew by 0.3% mom
• Higher production cost in mining sector supported the recovery in October
• The cost of crude materials for further processing continued to increase in October
• PPI to rise modestly

Malaysia’s producer price index (PPI) recovered by 0.7% yoy in October after dropping for two consecutive months (Sep: -0.2%; Oct: -0.3%). It marked the first increase in producer inflation since July, driven by rises in cost of mining sector which rose by 30.6% yoy in October. Meanwhile, the electricity & gas supply index grew at 1.0% yoy in October unchanged from the previous month. Nevertheless, agriculture, forestry & fishing (-17.6%), manufacturing (-0.7%) and water supply (-1.0%) index declined in October. The prolong decrease of production cost in agriculture, forestry & fishing and manufacturing sector since early this year had caused the drop in PPI throughout the year as both sectors attributed 88.3% of the total PPI.

On monthly basis, PPI for local production was up by 0.3% in October from 1.2% increase in the preceding month. The small rise in October was supported by manufacturing (+0.4%) and mining (+2.1%).

In terms of stage of processing (SOP), the cost of crude materials for further processing expanded by 7.8% yoy in October following a 7.1% rise in a month before. Whereas, the cost for intermediate materials, supplies & components and finished goods recorded a smaller decline in October as compared to September. The former contracted by 0.8% yoy (Sep: - 1.5%) whilst the later dropped 1.7% yoy (Sep: -2.7%). Both of these categories hold 83.6% over total PPI.

On monthly basis, the increase in PPI for local production by SOP in October was contributed by crude materials for further processing (+1.5%) and finished goods (+0.3%).

PPI to rise modestly

Producers’ cost inflation rose by 0.7% yoy in October, after a 0.2% fall in a month earlier and marked the first increase in producer inflation since July. At a time where global raw material prices are rising and the ringgit is weakening, the panellists surveyed by Markit for the October’s manufacturing PMI indicated that the SST introduction has fuelled a further month of sharp input cost inflation in Malaysia’s manufacturing sector. Meanwhile, the rate of inflation in October (0.6% yoy) was the fastest in almost a year associated with detrimental exchange rate movements, rising raw material prices and the implementation of SST. Consequently, the cost pressure has influenced a reduction in the buying activity as firms raised prices. Meanwhile, the ringgit continued to weaken in October against the dollar as USDMYR was traded between 4.1380-4.1850, compared to 4.1210-4.1515 in September. Moving forward, we foresee overall PPI will rise modestly underpinned by strong pick-up in raw material prices, weaker ringgit and implementation of SST.

Source: BIMB Securities Research - 3 Dec 2018