News

• Headline inflation rose at a faster pace at +1.5% yoy (Jul: +1.1% yoy), reversing the deceleration pace after six consecutive months of slower price increases. Inflation reading was higher than consensus estimate of +1.3% yoy.

• The acceleration was a result of slower decline in transport component and faster increase in services inflation.

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

• Core inflation was slightly higher at +2.2% yoy (Jul: +2.0% yoy).

Comments

• The faster-than-expected CPI reading was on account of slower decline in the transport segment (-6.7% yoy; Jul: -9.9% yoy) and faster services inflation (+2.4% yoy; Jul: +2.1% yoy).

• Transport category declined at a slower pace of -6.7% yoy due mainly to lower base of pump prices in August 2015. Meanwhile, diesel prices rose by 10 sen in August 2016 to reach RM1.70 per litre. Prices of RON95 and RON97 remained steady at RM1.75 and RM2.10 respectively.

• Food price inflation moderated for the second consecutive month to +3.5% yoy (Jul: +3.8% yoy) after increasing earlier this year due to unusual weather conditions and Ramadhan period. Within the food sub-segment, slower inflation was seen in prices of fish & seafood (+5.2% yoy; Jul: +6.0% yoy) and vegetable prices (+3.1% yoy Jun: +6.3% yoy).

• Services inflation rose to +2.4% yoy (Jul: +2.1 yoy), largely on account of increase in recreation services & culture (+3.6% yoy; Jul: +1.7% yoy) and miscellaneous goods and services (+2.5% yoy; Jul: +2.4% yoy). In recreation services & culture sub-group, cultural services segment (share: 47% of recreation services & culture segment) rose by +6.1% yoy. In miscellaneous goods and services subsector, personal care as well as insurance sector (share: 75%) contributed to the rise in services inflation.

• Core inflation (DOSM) rose to +2.2% yoy due to smaller contraction in transport prices and increase in services inflation. However, it still remained below the 2015 average of +3.1% yoy.

• While both core and services inflation have risen, 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. Our full year forecast of 2.0% 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% in Nov MPC meeting due to expectations of stronger growth in 2H 2016. We note that the weak inflation pressure accords BNM the flexibility to ease monetary policy should growth disappoint in 2H 2016.

Source: Hong Leong Investment Bank Research - 22 Sep 2016