Headline inflation moderated sharply to +0.8% YoY (May: +1.8% YoY), lower than consensus estimate of +1.3% YoY. The deceleration was due to lower price inflation across the sub-sectors that offset the faster growth in transport sub sector. Despite the slower than anticipated CPI reading in June, we maintain our inflation projection at +1.8% YoY (2017: +3.7% YoY), pending further details on SST coverage which is expected to be implemented in September 2018. As the moderation in CPI is anticipated to be transitory, we opine BNM will continue to maintain the OPR at 3.25% for the rest of the year.

DATA HIGHLIGHTS

On MoM basis, CPI was down -1.2% (May: +0.2%) due to government’s announcement to ‘zerorise’ the GST rate June 2018.

On annual basis, headline inflation moderated sharply to +0.8% YoY (May: +1.8% YoY) lower than consensus estimate. The deceleration was due to lower price inflation across most sub-sectors that offset the faster rise in the transportation sub sector.

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 +5.5% YoY (May: +3.8% YoY). This was mainly due to lower base effect a year ago. In Jun 2017, transportation price moderated to +10.5% YoY (May: +13.1% YoY) which gave an added impetus to inflation in June 2018. In June 2018, transportation sub-sector’s added +0.8ppt to overall headline inflation (May: +0.5ppt).

Food inflation continued to edge lower for the sixth consecutive month to +0.8% YoY (May: +2.2% YoY) despite the Raya festive period due to 0% GST, compounded by favourable weather and global supply conditions. On an annual basis, meat prices declined (-2.3% YoY; May: +1.0% YoY) as well as milk and eggs prices (-1.0% YoY; May: +0.9% YoY). Meanwhile, fruit prices grew at a slower pace (+0.9% YoY; May: +1.9% YoY), as well as fish & seafood prices (+2.4% YoY; May: +3.2% YoY).

Services inflation also moderated to +1.2% YoY (May: +2.2% YoY) as discretionary items such as recreation services and culture (-2.5% YoY; May: +0.5% YoY), communication (-3.9% YoY; May: -0.9% YoY) and other services (-2.6% YoY; May: +0.4% YoY) registered a contraction that was partially offset by the continued growth in education (+0.9% YoY; May: +1.2% YoY), and restaurant and hotels (+1.3% YoY; May: +2.1% YoY).

Core inflation (DOSM) also moderated sharply to +0.1% YoY (May: +1.5% YoY). Major groups that influenced the rate were food and beverage inflation (+1.0% YoY; May: +2.7% YoY), contraction in communication (-3.9% YoY; May: -0.9% YoY) and clothing and footwear (-3.1% YoY; May: -0.7% YoY).

HLIB’s VIEW

On a YTD basis, CPI averaged +1.6% YoY. Despite the slower inflation print in June 2018 due to “zerorisation” of GST, we maintain our CPI projection at +1.8% YoY for now, pending further details of SST coverage. As the moderation in CPI is anticipated to be transitory, 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 - 19 Jul 2018