News

• Headline inflation rose at a slower pace at +1.4% yoy (Sep: +1.5% yoy). Inflation reading was lower than consensus estimate of +1.5% yoy.

• The decline in transport, communication and clothing & footwear offset the price gains in food & alcoholic beverages and other components.

• On mom basis, CPI normalised, recording an increase of +0.3% after registering a contraction in the previous month (-0.3%).

• Core inflation moderated for the second consecutive month (+2.0% yoy; Sep: +2.1% yoy).

Comments

• The moderate CPI reading was on account of lower inflation in the food & beverage segment (+2.5% yoy; Sep: +3.0% yoy) while transport segment reported the same pace of decline (-5.5% yoy; Sept: -5.5% yoy).

• Transport category declined at a steady pace as the higher base effect in 2015 was offset by the rise in retail petrol prices in October 2016. During the month, RON95 and RON97 prices increased by 10 sen to reach RM1.80 and RM2.15 respectively. Meanwhile, diesel prices rose by 5 sen to reach RM1.75.

• Food price inflation continued to moderate for the fourth consecutive month to +2.5% yoy (Sep: +3.0% yoy) after increasing earlier this year due to unusual weather conditions and festival activities. Within the food sub segment, weaker inflation was seen in prices of meat (+2.4% yoy; Sep: +4.2% yoy) and vegetables (-1.1% yoy; Sep: +1.6% yoy) that offset the increase in fish & seafood (+5.0% yoy; Sep: +4.8% yoy).

• Services inflation was slightly lower at +2.3% yoy (Sep: +2.4 yoy), as prices in the hotel & restaurant sub-sector moderated to +2.0% yoy (Sep: +2.2% yoy), which offset the increase in health prices (+2.3% yoy, Sep: +2.2% yoy).

• Core inflation (DOSM) moderated to +2.0% yoy (Sept: +2.1% yoy) following contraction in clothing and footwear as well as communication prices.

• 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 rise from 1.6-1.7% in Nov-Dec mainly on removal of cooking oil subsidy, resulting in a full year reading of 2.1% in 2016. For 2017, we expect inflation to increase to 2.7%, tilted towards the higher-end of official projection of 2.0-3.0%. Our forecast has factored in higher fuel prices (Brent oil assumption: US$50/bbl in 2017; average 2016: US$44/bbl) and sustained food inflation arising from removal of cooking oil subsidy in Nov 2016 and weaker ringgit.

• We maintain our forecast for BNM to maintain policy rate at 3.00% in 2017 due to expectations of stronger growth. However, BNM may be inclined to lower rates should growth be negatively affected by external developments

Source: Hong Leong Investment Bank Research - 28 Nov 2016