News

• Headline inflation rose at a steady pace of +1.5% yoy in Sep (Aug: +1.5% yoy). Inflation reading was lower than consensus estimate of +1.8% yoy.

• The slower decline in transport prices was offset by moderation in food inflation.

• On mom basis, CPI registered the first decline of -0.3% (Aug: +0.5%) after five consecutive months of increase.

• Core inflation was slightly lower at +2.1% yoy (Aug: +2.2% yoy).

Comments

• The stable CPI reading was on account of lower inflation in the food & beverage segment (+3.0% yoy; Aug: +3.4% yoy) and slower pace of decline in the transport segment (-5.5% yoy; Aug: -6.7% yoy).

• Transport category declined by -5.5% yoy (Aug: -6.7% yoy) due to lower base effect in Sep 2015. In Sep 2016, both RON95 and RON97 prices declined by 5 cents to reach RM1.70 and RM2.05 respectively. Meanwhile, diesel prices remained stable at RM1.70 during the month under review.

• Food price inflation continued to moderate for the third consecutive month to +3.0% yoy (Aug: +3.4% yoy) after increasing earlier this year due to unusual weather conditions and festival activities. Within the food sub segment, slower inflation was seen in prices of fish & seafood (+4.8% yoy; Aug: +5.2% yoy), meat (+4.2% yoy; Aug: +6.9% yoy) and vegetable prices (+1.6% yoy Aug: +3.1% yoy). These components form one-third of food & non-alcoholic beverages CPI sub-sector.

• Services inflation was steady at +2.4% yoy (Aug: +2.4 yoy), as recreation services and culture moderated to +3.4% yoy from significant increase in the previous month (+3.6% yoy) while miscellaneous goods and services grew at a slowest pace of 1.5%, since March 2015. This offset the faster price increase in restaurants & hotels sub-sector.

• Core inflation (DOSM) moderated to +2.1% yoy (Aug: +2.2% yoy) following contraction in clothing and footwear as well as communication prices amid moderate increase in services inflation. It still remained below the 2015 average of +3.1% yoy.

• With the easing of core and moderate increase in 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 1.4- 1.6% yoy for the remainder of 2016. Our full year forecast of 2.0% sits at the lower bound of BNM 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 and 2017. 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 - 24 Oct 2016