Headline inflation rose slightly to +1.8% YoY (Apr: +1.4% YoY), in line with consensus estimate. The rise was due to higher price inflation in the transportation sector that offset the slower growth in food and beverage sub sector. We maintain our inflation projection at +1.8% YoY (2017: +3.7% YoY) and expectation for BNM to maintain the OPR at 3.25% for the rest of the year.

DATA HIGHLIGHTS

Headline inflation increased slightly to +1.8% YoY (Apr: +1.4% YoY) in line with consensus estimate. The higher increase was due to faster rise in the transportation sub-sector that offset the slower increase in food and beverage sub-sector.

On a MoM basis, CPI was up +0.2% after recording flat growth in the previous month. Core inflation remained steady at +1.5% YoY.

Average prices of RON95 and RON97 were maintained at RM2.20 and RM2.47 respectively throughout the month. Despite the unchanged level of petrol prices compared to the previous month, transportation category registered a notable increase of +3.8% YoY (Apr: +0.4% YoY). This was mainly due to lower base effect a year ago. In May 2017, transportation price increased by +13.1% YoY, a moderation from +16.7% YoY in the previous month which gave an added impetus to inflation in May 2018. In May 2018, transportation sub-sector’s added +0.5 ppt to overall headline inflation (Apr: +0.1ppt).

Food inflation continued to edge lower for the fifth consecutive month to +2.2% YoY (Apr: +2.6% YoY). However, on a monthly basis, this is the first increase it has recorded (+0.2% MoM) after registering a contraction for two consecutive months (Apr: -0.2% MoM; Mar: -0.5% MoM). The monthly increase in food and beverage could be attributed to Ramadhan period. Nevertheless, due to the favourable weather and global supply conditions, the increase was rather muted compared to previous years. On an annual basis, slower food prices was attributed to lower rice, bread and other cereal prices (+1.6% YoY; Apr: +1.7% YoY), slower fish and seafood prices (+3.2% YoY; Apr: +4.1% YoY) and decline in vegetable prices (-3.0% YoY; Apr: -0.5% YoY).

Services inflation remained at +2.2% YoY as the slower increase in furnishing, household equipment and maintenance (+2.1% YoY; Apr: +2.0% YoY) was offset by the moderation in restaurant sector (+2.1% YoY; Mar: +2.2% YoY).

Core inflation (DOSM) also remained steady at +1.5% YoY (Apr: +1.5% YoY). Major groups that influenced the rate were food and beverage inflation (+2.7% YoY; Apr: +2.8% YoY), contraction in clothing and footwear (-0.7% YoY; Apr: -0.8% YoY) that offset the increase in utilities (+2.5% YoY; Apr: +2.4% YoY) and education prices (+1.2% YoY; Apr: +1.1% YoY).

HLIB’s VIEW

On a year-to-date basis, CPI has averaged +1.8% YoY. Going forward, the stable petrol price and removal of GST is expected to offset the increase in transportation price as base effect fades leading to moderate inflation prospects. The effective gas tariff revision for households is lower at RM23.80 for July-December 2018 (Jan-Jun 2018: RM23.92), which is also anticipated to knock off -0.0025ppt to overall headline CPI. Due to the moderate increase in headline and core inflation, we maintain our expectations for BNM to retain the OPR at 3.25% for the rest of the year.

Source: Hong Leong Investment Bank Research - 21 Jun 2018