News

• Headline inflation rose at a faster pace of +1.8% yoy (Oct: +1.4% yoy). Inflation reading was higher than consensus estimate of +1.5% yoy.

• The higher consumer price index was driven by stronger increase in the food and beverages sub-sector and the slower pace of decline in the transport sub-sector.

• On mom basis, CPI posted the fastest pace of expansion since April 2015, as it recorded a rise of +1.0% (Oct: +0.3%).

• Core inflation rose at a stronger pace in November (2.2%; Oct: 2.0% yoy).

Comments

• The faster pace of CPI reading was boosted by higher inflation in the food & beverage segment (+3.8% yoy; Oct: +2.5% yoy) following the government’s decision to remove subsidies on most cooking oil packages effective 1st November 2016.

• In addition, transport category declined at slower pace (-1.5% yoy; Oct: -5.5% yoy) following higher retail petrol prices in November 2016. During the month, RON95, RON97 and diesel prices increased by 15 cents to reach RM1.95, RM2.30 and RM1.90 respectively.

• After moderating for four consecutive months, food price inflation reversed its trend and recorded a faster pace of price increase (+3.8% yoy; Oct: +2.5% yoy). Of significance, oil sub-sector rose 36.6% yoy in November, reflecting the removal of cooking oil subsidies. Other sub sectors including meat and vegetable also registered faster pace of inflation (+6.0% yoy and +3.6% yoy respectively; Oct: +2.4% yoy and -1.1% yoy respectively).

• Services inflation was slightly lower at +2.2% yoy (Oct: +2.4 yoy), as prices in the hotel & restaurant sub-sector moderated to +1.9% yoy (Oct: +2.0% yoy).

• Core inflation (DOSM) rose by +2.2% yoy (Oct: +2.0% yoy) following price increases for food & non-alcoholic beverages, health and housing, water, electricity, gas and other fuel prices.

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

• We expect CPI growth to average 2.1% yoy 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% as transitory effects of low commodity prices wane. 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 November 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 - 22 Dec 2016