Headline inflation remained modest at +0.9% YoY (Jun: +0.8% YoY), in line with consensus estimate. The slight increase in CPI was due to higher inflation in transport and housing, utilities subsectors that offset the slower growth in food and beverage sub-sector and continued decline in communication and recreation services and culture sub-sectors. 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

Due to zero-GST tax holiday period, headline inflation remained moderate at +0.9% YoY (Jun: +0.8% YoY). On MoM basis, CPI was up +0.2% (Jun: -1.2%).

On an annual basis, headline inflation remained modest at +0.9% YoY (Jun: +0.8% YoY). The slight increase was due to higher transport (+6.7% YoY; Jun: +5.5% YoY) and housing, water, electricity, gas and other fuels price inflation (+2.0% YoY; Jun: +1.5% YoY) that offset the slower growth in food and beverage sub-sector (+0.7% YoY; Jun: +0.8% YoY) and continued decline in other services sub-sectors.

The average price of RON95 was maintained at the subsidised price of RM2.20 while RON97 average price was slightly higher at RM2.57 (Jun: RMRM2.56) during the month. Despite the unchanged level of petrol prices compared to the previous month, transportation category registered a notable increase of +6.7% YoY (Jun: +5.5% YoY). In July 2017, transportation price moderated to +7.7% YoY (Jun: +10.5% YoY) which gave an added impetus to inflation in July 2018. In July 2018, transportation sub-sector’s added +0.9ppt to overall headline inflation (Jun: +0.8ppt).

Food inflation continued to edge lower for the 7th consecutive month to +0.7% YoY (Jun: +0.8% YoY). On an annual basis, meat prices continued to decline albeit at a slower pace of -1.8% YoY (Jun: -2.3% YoY) as well as milk and eggs prices (-0.9% YoY; Jun: -1.0% YoY) and vegetable prices (-0.9% YoY; Jun: -2.6% YoY). This was also in line with global food prices which continued to show weakness due to weaker demand amid stronger production.

Services inflation also moderated slightly to +1.1% YoY (Jun: +1.2% YoY) as discretionary items such as recreation services and culture (-2.4% YoY ; Jun: -2.5% YoY), communication (-3.9% YoY; Jun: -3.9% YoY) and other services (-3.0% YoY; Jun: -2.6% YoY) registered a contraction that was partially offset by the continued growth in education (+1.0% YoY; Jun: +0.9% YoY), and restaurant and hotels (+1.0% YoY; Jun: +1.3% YoY).

Core inflation (DOSM) dipped slightly to -0.2% YoY after growing marginally by +0.1% YoY in the previous month. On a monthly basis, core inflation remained flat (0% MoM; Jun: -1.4% MoM). Major groups that influenced the rate were food and beverage inflation (+0.8% YoY; Jun: +1.0% YoY), contraction in communication (-3.9% YoY; Jun: -3.9% YoY) and clothing and footwear (-3.0% YoY; Jun: -3.1% YoY).

HLIB’s VIEW

On a YTD basis, CPI has averaged +1.5% YoY. We opine that inflation will continue to remain weak in August 2018 due to zero-GST tax holiday high base effect. However, inflation is anticipated to pick up thereafter when SST 2.0 comes into effect in September 2018. 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 - 27 Aug 2018