News

• Headline inflation trended higher to +3.2% yoy in January (Dec: +1.8% yoy). The reading came in higher than our and consensus estimate of +2.9% yoy and +2.7% yoy respectively.

• The acceleration in CPI growth was a result of faster growth in the food and beverages sub-sector and rebound in transportation sub-sector.

• On mom basis, CPI rose +1.1% in January after remaining unchanged in December. Core inflation rose at a slightly faster pace in January (+2.3% yoy; Dec: +2.1% yoy).

Comments

• The spike in headline inflation reading was on account of higher food and beverage inflation and price increase in the transportation sub-sector.

• Prices of transport category rebounded after registering annual declines for ten consecutive months (Jan: +8.3% yoy; Dec: -0.6% yoy). This was due to increase in petrol prices in January 2017 and lower base effect in 2016. In January 2017, RON 95 petrol prices rose by 20 sen, the biggest monthly rise since March 2015. Of significance, transportation sector contributed 1 percentage point to the overall headline inflation in January.

• Food inflation rose at a faster pace of +4.0% yoy (Dec: +3.7% yoy) due to unfavourable weather condition in January that led to shortage of vegetable crops (+7.8% yoy; Dec: +4.8% yoy) and seafood (+6.1% yoy; Dec: +5.6% yoy) as well as festivity (Chinese New Year).

• Services inflation was higher at +2.5% yoy (Dec: +2.2 yoy), as prices in the hotel & restaurant sub-sector was higher +2.1% yoy (Dec: +1.9% yoy) while education also grew at a faster pace of +2.0% yoy (Dec: +1.7% yoy).

• Core inflation (DOSM) rose to +2.3% yoy (Dec: +2.1%), influenced by increase in transport prices, food and non alcoholic beverages, recreation services and culture, health and utility prices. Nevertheless, core inflation remained below 2014-2016 average of 2.7%.

• Despite the spike in January headline inflation, we still expect demand-driven inflation to be contained given the subdued consumer sentiment. The new Price Control And Anti-Profiteering Act 2016 (replacing previous Act of 2011) which came into effect on January 2017 will also limit rampant pass-through of higher fuel prices.

• For 2017, we expect inflation to average 3.4% (2016: +2.1%), primarily due to lower base effect arising from higher of commodity prices. Our forecast has factored in higher fuel prices (Brent oil assumption: US$55/bbl & RON 95 retail price of RM2.30/litre) and sustained food inflation arising from removal of cooking oil subsidy in November 2016 and weaker ringgit.

• We do not foresee BNM reacting to higher headline inflation as it is a result of normalisation in commodity price rather than excessive domestic demand. We maintain our forecast for BNM to stand pat in 2017.

Source: Hong Leong Investment Bank Research - 23 Feb 2017