Headline inflation moderated further to +0.2% YoY (Jul: +0.9% YoY), below the consensus estimate of +0.4% YoY. The slowdown in CPI was due to a sharp deceleration in transport sub-sector, moderation in food and beverage sub sector and continued decline across other 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

As the zero-GST tax holiday period continued, headline inflation remained modest at +0.2% YoY (Jul: +0.9% YoY), registering the lowest rate in 3.5 years. On month-on month basis, CPI grew at +0.2% (Jul: +0.2%).

On annual basis, headline inflation remained modest at +0.2% YoY (Jul: +0.9% YoY). This was mainly due to a sharp deceleration in transport sub-sector (+2.1% YoY; Jul: +6.7% YoY), moderation in food and beverage sub-sector (+0.4% YoY; Jul: +0.7% YoY) and continued decline across other sub-sectors that offset a marginal rise in education sub-sector (+1.1% YoY; Jul: +1.0% YoY).

The average price of RON95 was maintained at RM2.20 while the RON97 average price was higher at RM2.65 (Jul: RMRM2.57) during the month. The transportation sub-sector slowed to +2.1% YoY (Jul: +6.7% YoY) despite the slight uptick in petrol prices. This was mainly due to a higher base effect a year ago. In August 2017, transportation price accelerated to +11.7% YoY (Jul: +7.7% YoY) which acted as a disincentive to inflation in August 2018.

Food inflation edged lower for the eighth consecutive month to +0.4% YoY (Jul: +0.7% YoY). On the global front, food prices also declined by -5.4% YoY (Jul: -6.6% YoY). In Malaysia, on an annual basis, meat prices continued to decline at a faster pace of -3.1% YoY (Jul: -1.8% YoY) as well as rice, bread and other cereals (-0.5% YoY; Jul: -0.2% YoY) and oils and fats (-0.8% YoY; Jul: -0.4% YoY). Prices declined at a slower pace for milk and eggs (-0.7% YoY; Jul: -0.9% YoY) and vegetables (- 0.5% YoY; Jul: -0.9% YoY). These offset the increase in fruit prices (+0.6% YoY; Jul: 0.0% YoY).

Services inflation also remained at +1.1% YoY (Jul: +1.1% YoY) as contraction in discretionary items such as recreation services and culture (-2.2% YoY; Jul: -2.4% YoY), communication (-4.0% YoY; Jul: -3.9% YoY), other services (-3.0% YoY; Jul: - 3.0% YoY) and moderation in restaurant and hotels (+0.7% YoY; Jul: +1.0% YoY) was partially offset by the continued growth in education (+1.1% YoY; Jul: +1.0% YoY).

Core inflation (DOSM) continued to decline by -0.2% YoY, similar to the previous month. Nevertheless, on a monthly basis, core inflation increased by +0.3% (Jul: 0% MoM). Major groups that influenced the rate were contraction in communication (- 4.0% YoY; Jul: -3.9% YoY), clothing and footwear (-2.9% YoY; Jul: -3.0% YoY) and recreation services and culture (-2.2% YoY; Jul: -2.4% YoY).

HLIB’s VIEW

Despite the sharp moderation in inflation figure, we opine that CPI may begin to pick up when SST 2.0 comes into effect in September 2018. As the continued 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 - 20 Sept 2018