News

• Headline inflation was steady at +1.8% yoy in December (Nov: +1.8% yoy). Inflation reading was a tad lower than consensus estimate of +1.9% yoy.

• The stable consumer price index was a result of slower growth in the food and beverages sub-sector offsetting the slower pace of decline in transportation sub-sector.

• On mom basis, CPI was unchanged after recording a rise of +1.0% in November. Core inflation rose at a slightly slower pace in December (+2.1% yoy; Nov: +2.2% yoy).

Comments

• The stable inflation reading was on account of slightly lower food and beverage inflation that offset the slower decline in transportation sector.

• Transport category declined at a diminished pace (-0.6% yoy; Nov: -1.5% yoy). This was due to lower base in retail petrol prices in December 2015 despite the reduction in petrol prices by 5 sen in December 2016. RON95, RON97 and diesel were priced at RM1.90, RM2.25 and RM1.85 respectively.

• Despite a marginal easing of food inflation (+3.7% yoy; Nov: +3.8% yoy), the government’s removal of cooking oil subsidies has led to growth of 36.9% yoy in the oils sub segment. However, this was partly offset by the slower gains in meat prices (3.0% yoy; Nov: +6.0% yoy) as well as rice, bread and other cereals (0.7% yoy; Nov: +0.9% yoy).

• Services inflation was also steady at +2.2% yoy (Nov: +2.2 yoy), as prices in the hotel & restaurant sub-sector held stable at +1.9% yoy (Nov: +1.9% yoy).

• Core inflation (DOSM) rose by a more moderate pace of +2.1% yoy (Nov: +2.2% yoy) following slower price increase in recreation services and culture as well as healthcare prices.

• With the moderate increase of core and services inflation, we expect demand-driven inflation to be contained. The new Price Control And Anti-Profiteering Act 2016 (replacing previous Act of 2011) which came into effect on January 2017 will also limit the expansion of CPI increase.

• CPI averaged at +2.1% yoy in 2016, as forecasted. The modest pace of inflation was due mainly to the decline in oil prices which subtracted 0.6ppt from headline inflation. For 2017, we expect inflation to increase to 2.7% yoy, and possibly outpace 3% yoy in early 2017 before moderating towards the end of the year 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.

• Despite the higher CPI projection in 2017, we do not foresee BNM reacting to it as it is a result of normalisation in commodity price rather than excessive demand. We maintain our forecast for BNM to stand pat throughout 2017.

Source: Hong Leong Investment Bank Research - 19 Jan 2017