News

• Headline inflation eased further to +2.0% yoy in May (Apr: +2.1% yoy), in line with consensus estimate.

• Moderation in CPI was broad-based across most sectors with majority of components registering lower annual growth while prices of transport, clothing & footwear as well as communication declined.

• On mom basis, CPI rose for the second consecutive month, recording an increase of +0.3% (Apr: +0.4%)

• Core inflation moderated further to +2.1% yoy (Apr: +2.3% yoy).

Comments

• The continued moderation in May inflation was mainly on account of the lapse of GST effect after a full year of implementation.

• Most of the CPI components recorded weaker figures in May, with the exception of alcoholic beverages & tobacco and education categories (+22.1% yoy; +2.2% yoy respectively; Apr: +20.1% yoy; +2.1% yoy respectively)

• Transport prices continued to register a decline of -5.6% yoy (Apr: -5.5% yoy) while it remained flat on a month-onmonth basis (Apr: +3.3% mom). During the month under review, RON95, RON97 and diesel prices remained steady at RM1.70, RM2.05 and RM1.55 respectively.

• Food price inflation remained high at +4.1% yoy (Apr: +4.2% yoy) mainly due to imported inflation and unfavourable weather conditions (El Nino) that affected crop yields. Within the food sub-segment, strong inflation was seen in prices of vegetables (+15.3% yoy; Apr: +12.5% yoy) and fish & seafood (+6.6% yoy; Apr: +8.4% yoy).

• Services inflation eased slightly to +2.4% yoy (Apr: +2.5 yoy) further indicating that GST impact continued to diminish after a full year of implementation. Growth of major service components moderated during the month, i.e. restaurants & hotels (+2.5% yoy; Apr: +2.7% yoy) and health (+2.0% yoy ; Apr: +2.2% yoy).

• Core inflation (DOSM) also eased significantly to +2.1% yoy after hitting a high of +3.8% yoy in Dec-15 and remaining stable at +3.0% yoy in Jan-May 2016, due to slower inflation rate across all segments particularly food and services sub-sectors.

• With the easing of both core and services inflation, we expect demand-driven inflation to be contained mainly on moderate consumption growth outlook.

• We maintain our CPI growth forecast for 2016 at 2.5%. We expect CPI growth to range bound for the remainder of 2016 with lesser drag from transport segment (gradual rise in pump prices) offsetting lapse of GST effect .

• Inflation is not a concern for BNM. We expect BNM to wait patiently for income measures and infrastructure investment to take effect before assessing the need for a change in monetary policy.

Source: Hong Leong Investment Bank Research - 16 Jun 2016