News

• Headline inflation increased to +3.7% yoy in August (Jul: +3.2% yoy), higher than consensus estimate of +3.4% yoy.

• The rise mainly emanated from faster growth in the transportation sub-sector due to higher monthly petrol prices.

• On mom basis, CPI increased by +0.9% in August, the first rise after contracting in four out of the five previous months (Jul: 0.0%). Core inflation moderated in August (+2.4% yoy; Jul: +2.6% yoy).

Comments

• The increase in inflation reading was mainly on account of faster price growth in the transportation price inflation.

• Transport category accelerated to +11.7% yoy (Jul: +7.7% yoy) due to higher pump prices, in line with the rise in global crude oil prices. In August, retail petrol prices advanced further. Average price of RON95 and RON97 was higher at RM2.12 and RM2.39 respectively (Jul: RM1.95 and RM2.12 for RON95 and RON97 respectively). This is in line with the rise in Brent crude oil prices (US$51.8/pb; Jul: US$49.1/pb) following concerns of supply issues due to weather distortion in the US. Of significance, transportation sub-sector contributed a substantial boost of +1.5ppts to headline inflation.

• Food inflation edged slightly higher to +4.3% yoy (Jul: +4.2% yoy). In particular, fish & seafood inflation trended upwards (+8.1% yoy; Jul: +6.7% yoy) despite the lower global food price. Meanwhile, oils and fats continued to see an increase of +39.2% yoy (Jul: +39.5% yoy) due to removal of oil subsidy.

• Services inflation trended slightly lower to +2.6% yoy (Jul: +3.0% yoy), as the rise in restaurant and hotels (+2.8% yoy; Jul: +2.6% yoy) was offset by the sharp moderation in services and culture (+0.4% yoy; Jul: +2.6% yoy).

• Core inflation (DOSM) edged lower to +2.4% yoy (Jul: +2.6%), due to slower increase in food and beverage (+4.3% yoy; Jul: +4.4% yoy) as well as recreation service and culture (+0.4% yoy; Jul: +2.6% yoy).

• The acceleration in August inflation was expected as the petrol prices rose in August. In September, inflation is expected to rise further due to higher petrol prices during the month before resuming moderation trend towards the end of the year.

• We expect domestic-demand inflation to be contained, consistent with moderation in core inflation and BNM’s assessment. Nevertheless, the more robust domestic demand could feed to sustained core inflation.

• We maintain our inflation forecast at 3.4% for 2017. We note that there is an upside risk to our forecast should global oil prices rise persistently above our assumption of US$55/pb. Despite this, we do not see BNM reacting to the temporary rise in headline inflation as it is driven by supply (commodity) factor. We maintain our forecast for BNM to stand pat in 2017.

Source: Hong Leong Investment Bank Research - 2 Oct 2017