News

• Headline inflation accelerated to +4.5% yoy in February (Jan: +3.2% yoy), exceeding consensus estimate of +3.9% yoy.

• The acceleration was a result of faster growth in the food and beverages sub-sector and strong growth in transportation sub-sector. These two components contributed 3.2ppts to headline inflation.

• On mom basis, CPI rose +1.3% in February after recording growth of +1.1% in January. Core inflation rose at a faster pace in February (+2.5% yoy; Jan: +2.3% yoy).

Comments

• The higher inflation reading was on account of higher food inflation and price surge in transportation sub-sector.

• Transport category accelerated further to 17.9% yoy (Jan: +8.3% yoy). In February 2017, RON95 and RON97 petrol prices rose by 20 sen. Consequently, RON95, RON97 and diesel were priced at RM2.30, RM2.60 and RM2.15 respectively. We understand that the spike in petrol retail price in February was a result of shutdown of several refineries in the Middle East and Asia due to fires and other technical problems. This led to a decline in supply that resulted in higher margins for refined petrol prices. The low base in 2016 also played a key role.

• Food inflation rose at a faster pace of +4.3% yoy (Jan: +4.0% yoy). This is consistent with the increase in global food price index. In Malaysia, food inflation was contributed by oils & fats (+38.3% yoy, due to removal of cooking oil subsidy), vegetables (+9.5% yoy) and meat (+4.6% yoy).

• Services inflation was higher at +2.7% yoy (Jan: +2.5 yoy), as prices in the hotel & restaurant sub-sector were higher by +2.3% yoy (Jan: +2.1% yoy) while that of education moderated (+1.7% yoy; Jan: +2.0% yoy).

• Core inflation rose at +2.5% yoy (Jan: +2.3%), influenced by increase in transport prices, food & non-alcoholic beverages, housing water and electricity. Nevertheless, core inflation remained below 2014-16 average of 2.7%.

• Despite the higher inflation numbers, we expect demand driven inflation to be contained as economic indicators suggest a moderate recovery (household loan growth: +5.2% yoy; MIER sentiment index: 69.8). In addition, the new Price Control And Anti-Profiteering Act 2016 will also limit the second round impact.

• In the near-term, we anticipate inflation to accelerate in March before moderating thereafter to reach full year forecast of 3.4% yoy. Our forecast has factored in higher fuel prices (RON95: RM2.20/litre in 2017; 2016 average: RM1.76/litre) and sustained food inflation arising from removal of cooking oil subsidy in Nov 2016 and weak ringgit.

• We maintain our forecast for BNM to stand pat in 2017, as the stable domestic demand growth outlook is not expected to fan excessive demand-pull inflation

Source: Hong Leong Investment Bank Research - 27 Mar 2017