News

• Headline inflation moderated further to +3.9% yoy in May (Apr: +4.4% yoy), slightly lower than consensus estimate of +4.1% yoy.

• The moderation was a result of slower growth in the transportation sub-sector as the base effect continued to wane.

• On mom basis, CPI declined by -0.2% in May, registering its third consecutive contraction (Apr: -0.2%). Core inflation rose slightly in May (+2.6% yoy; Apr: +2.5% yoy).

Comments

• The moderation in inflation reading was mainly on account of slower price growth in the transportation sub-sector, which more than offset higher food price inflation.

• Transport category moderated to +13.1% yoy (Apr: +16.7% yoy) due to low base effect amid lower pump prices. In May 2017, retail petrol prices moderated in line with lower global oil prices. Average price of RON95 and RON97 was lower at RM2.08 and RM2.36 respectively compared to the previous month (Apr RON95: RM2.20; RON97: RM2.30). Despite the moderation in retail petrol prices, transportation sub-sector still contributed a substantial boost of +1.7ppts to headline inflation.

• Food inflation rose at a faster pace of +4.4% yoy (Apr: +4.1% yoy) due partly to Ramadhan period that started in late-May. In particular, meat prices rose by +5.1% yoy (Apr: +4.2% yoy) while fish & seafood inflation increased by +7.7% yoy (Apr: +6.2% yoy).

• Services inflation remained steady at +2.9% yoy (Apr: +2.9 yoy), as prices in health sub-sector accelerated to +2.9% yoy (Apr: +2.8% yoy), but was offset by slower price increase in restaurant and hotels (+2.3% yoy; Apr: +3.0% yoy).

• Core inflation (DOSM) rose slightly to +2.6% yoy (Apr: +2.5%), as the increase in health prices (+2.9% yoy; Apr: +2.8% yoy), food and beverage (+4.2% yoy; Apr: +4.1% yoy) more than offset the moderation in restaurant and hotel (+2.3% yoy; Apr: +2.4% yoy) and decline in clothing and footwear (-0.2% yoy; Apr: -0.1% yoy).

• The moderation in inflation was expected as the impact of low base effect particularly in March 2016 dissipates further. Going forward, we expect inflation to tame further as the impact of base effect continues to ebb off. At the same time, we expect domestic-demand inflation to be contained.

• We maintain our full year 2017 inflation forecast at 3.4%. The recent weakening bias in commodity prices particularly crude oil price amid still weak ringgit will exert lesser pressure on oil-related sectors (i.e. transportation). This would help further easing of CPI reading in the coming months.

• We maintain our forecast for BNM to stand pat in 2017.

Source: Hong Leong Investment Bank Research - 22 Jun 2017