News

• Headline inflation eased for the fifth consecutive month in July to +1.1% yoy (Jun: +1.6% yoy), slightly lower than consensus estimate of +1.2% yoy.

• The moderation was a result of larger decline in transport component and moderation in food and beverage inflation.

• On mom basis, CPI rose for the fourth consecutive month, recording an increase of +0.3% (Jun: +0.2%).

• Core inflation was slightly lower at +2.0% yoy (Jun: +2.1% yoy).

Comments

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

• Approximately 61% of components in CPI basket recorded weaker YoY increase, as food & non-alcoholic beverages moderated to +3.8% yoy (Jun: +4.2% yoy), while transport segment registered a larger decline at -9.9% yoy (Jul: -8.5% yoy).

• Transport category experienced a price decline of -9.9% yoy following a higher base as RON95 was priced the highest level for the year in July 2015 at RM2.15. In July 2016, RON95, RON97 and diesel prices rose 5 cents to RM1.75, RM2.10 and RM1.60 respectively.

• Food price inflation moderated to +3.8% yoy (Jun: +4.2% yoy) after increasing in the previous month due to Ramadhan period. Within the food sub-segment, slower inflation was seen in prices of fish & seafood (+6.0% yoy; Jun: +7.8% yoy) and vegetable prices given the tapering of El Nino impact (+6.3% yoy Jun: +12.5% yoy).

• Services inflation eased to +2.1% yoy (Jun: +2.3 yoy) further confirming diminishing of GST impact after a full year of implementation. Growth of some major services components moderated during the month, i.e. restaurants & hotels (+2.1% yoy; Jun: +2.2% yoy) and communication (-2.3% yoy; Jun: -2.2% yoy).

• Core inflation (DOSM) moderated further to +2.0% yoy after hitting a high of +3.8% yoy in Dec-15 and remaining stable at +2.8% yoy in Jan-Jul 2016, due to slower inflation rate across non-food segments.

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

• We expect CPI growth to hover in a subdued range of 1.2- 1.8% yoy for the remainder of 2016. Given the lower-thanexpected inflation reading, we lower our CPI growth forecast to 2.0% (previously 2.2%). Our forecast sits at the lower bound of BNM revised inflation forecast of 2.0-3.0% for 2016.

• We maintain our forecast for BNM to maintain policy rate at 3.00% till year-end due to expectations of stronger growth in 2H 2016. We note that the weaker-than-expected inflation rate accords BNM the flexibility to ease monetary policy should growth disappoint in 2H2016.

Source: Hong Leong Investment Bank Research - 25 Aug 2016