News

• Headline inflation moderated further to +3.2% yoy in July (Jun: +3.6% yoy), slightly lower than consensus estimate of +3.3% yoy.

• The moderation was a result of slower growth in the transportation sub-sector due to lower monthly petrol prices and fading base effect.

• On mom basis, CPI declined by -0.1% in July, registering its fifth consecutive contraction (Jun: -0.2%). Core inflation increased slightly in July (+2.6% yoy; Jun: +2.5% yoy).

Comments

• The moderation in inflation reading was mainly on account of slower price growth in the transportation sub-sector, and slower food price inflation.

• Transport category moderated to +7.7% yoy (Jun: +10.5% yoy) due to lower pump prices amid easing base effect. In July 2017, retail petrol prices moderated further. Average price of RON95 and RON97 was lower at RM1.63 and RM1.84 respectively (Jun: RM2.01 and RM2.28 for RON95 and RON97 respectively). Despite the moderation in retail petrol prices, transportation sub-sector still contributed a substantial boost of +1.1ppts to headline inflation.

• Food inflation increased at a slower pace of +4.2% yoy (Jun: +4.3% yoy) post festive season in June. In particular, meat prices rose at a slower pace of +1.3% yoy (Jun: +4.2% yoy), similar to fish & seafood inflation trend (+6.7% yoy; Jun: +7.2% yoy). This offset the double-digit growth seen in oils and fats of +39.5% yoy.

• Services inflation remained steady at +3.0% yoy (Jun: +3.0% yoy), as the rise in restaurant and hotels (+2.6% yoy; Jun: +2.5% yoy) was offset by the moderation in education (+1.6% yoy; +1.7% yoy) and services and culture (+2.6% yoy; Jun: +3.0% yoy).

• Core inflation (DOSM) edged up to +2.6% yoy (Jun: +2.5%), due to faster increase in health prices (+2.9% yoy; Jun: +2.6% yoy), and food and beverage (+4.4% yoy; Jun: +4.1% yoy).

• The moderation in July inflation was expected as the impact of low base effect particularly in March 2016 dissipates further. However, inflation could rise in the near term due to higher petrol prices in August 2017 before resuming moderation trend towards the end of the year.

• We expect domestic-demand inflation to be contained, consistent with BNM’s assessment for inflation to moderate in 2H17 mainly reflecting the waning effect of global cost factors. Nevertheless, the more robust domestic demand could feed to sustained core inflation.

• We maintain our full year 2017 inflation forecast at 3.4%. While there may be intermittent increase in inflation, the overall weak bias in commodity prices particularly crude oil price amid still weak ringgit will exert lesser pressure on oil related sectors (i.e. transportation). We maintain our forecast for BNM to stand pat in 2017.

Source: Hong Leong Investment Bank Research - 24 Aug 2017