News

• Headline inflation accelerated to +5.1% yoy in March (Feb: +4.5% yoy), lower than consensus estimate of +5.2% yoy.

• The acceleration was a result of faster growth in the transportation sub-sector which contributed 2.9ppts to headline inflation.

• On mom basis, CPI declined by -0.1% in March, registering its first contraction in five months (Feb: +1.3%). Core inflation rose at a steady pace in March (+2.5% yoy).

Comments

• The higher inflation reading was on account of higher price growth in the transportation sub-sector.

• Prices of transport category accelerated further by 23.0% yoy (Feb: 17.9% yoy). The surge was mainly due to low base effect as retail petrol prices reached the trough in March 2016 (RON95: RM1.60; RON97: RM1.95). M-o-m basis, prices of RON95 and RON97 were unchanged in March 2017 at RM2.30 and RM2.60 respectively. Meanwhile diesel prices rose 5 sen to RM2.20 (Feb: RM2.15). We understand that the elevated petrol retail price in March was a result shutdown of several refineries due to fires and other technical problems that led to a decline in supply.

• Food inflation rose at a slower pace of +4.1% yoy (Feb: +4.3% yoy). This is consistent with the decline in global food price index. In Malaysia, slower food inflation was contributed by lower price increase in meat (+3.7% yoy; Feb: +4.6% yoy) and vegetables (+4.8% yoy; Feb: +9.5% yoy).

• Services inflation increased to +2.8% yoy (Feb: +2.7 yoy) mainly on higher prices in health sub-sector (+2.6% yoy; Feb: +2.4% yoy). Meanwhile, prices of both education and restaurants & hotels remained steady at +1.7% yoy and +2.3% yoy.

• Core inflation (DOSM) remained moderate at +2.5% yoy (Feb: +2.5%), as the increase in health prices (+2.6% yoy; Feb: +2.4% yoy) were offset by slower rise in transportation prices excluding petrol prices (+2.9% yoy; Feb: +3.1% yoy). Meanwhile, communication prices registered a contraction as suppliers continued to be competitive in this segment.

• We opine that headline inflation had already peaked in March and we expect the reading to moderate from April onwards as the impact of base effect ebbs off. At the same time, we expect demand-driven inflation to be contained as economic indicators still point to moderate growth in consumption.

• We maintain our full year CPI growth forecast at 3.4% yoy. Our forecast has factored in higher fuel prices (Brent oil assumption: US$55/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 stand pat in 2017

Source: Hong Leong Investment Bank Research - 20 Apr 2017