Headline inflation inched up slightly to +0.3% YoY (Aug: +0.2% YoY), below the consensus estimate of +0.6% YoY. Despite the reintroduction of SST 2.0, inflation remained tepid due to sharp deceleration in transport sub-sector, moderate food inflation and modest adjustment in other sub-sectors. Going forward, we expect prices to remain moderate as the upward adjustment in prices post SST 2.0 will be offset by diminishing contribution from transport sub-sector due to base effect and fuel price subsidy.

DATA HIGHLIGHTS

Headline inflation remained tepid as it registered a slight uptick of +0.3% YoY (Aug: +0.2% YoY), lower than estimate of +0.6% YoY.

Despite the reintroduction on of SST 2.0 in September after the end of consumption tax holiday period (Jun-Aug 2018), inflation surprised on the downside and remained modest at +0.3% YoY (Aug: +0.2% YoY). This was mainly due to a sharp deceleration in transport sub-sector (+0.3% YoY; Aug: +2.1% YoY), moderate food inflation (0.5% YoY; Aug: 0.4% YoY) and continued decline in other sub-sectors (clothing & footwear, communication).

The average price of RON95 was maintained at RM2.20. After weekly changes in the price of RON97 in June-Aug 2018, the government has announced that the price of RON97 will be RM2.65 per litre in September 2018, unchanged from the average price recorded in August. Consequently, the transportation sub-sector slowed to +0.3% YoY (Aug: +2.1% YoY), also enhanced by higher base effect a year ago.

Food inflation edged slightly higher to +0.5% YoY (Aug: +0.4% YoY). “Food away from home” grew at a faster pace of +2.6% YoY (Aug: +1.7% YoY) while “food at home” continued to decline (-0.7% YoY; Aug: -0.4% YoY). The divergence in price trends indicates that SST implementation was more prevalent in “food away from home” as opposed to other food categories, especially those that were exempted (e.g. rice, meat, vegetables). Rice, bread and cereal continued to contract at the same pace of -0.5% YoY while meat price declined, albeit at a slower pace of -2.3% YoY (Aug: -3.1% YoY). Vegetable prices contracted by a larger pace of -1.2% YoY (Aug: - 0.5% YoY). Global food prices, as indicated by IMF Food Price Index also contracted by -7.4% YoY, due to ample supply.

Services inflation rose to +1.6% YoY (Aug: +1.1% YoY) following increase in utility sub-sector (+2.1% YoY; Aug: +2.0% YoY), and restaurant and hotels (+1.1% YoY; Aug: +0.7% YoY). Despite the decline in communication and recreation services and culture (-1.6% YoY; -0.2% YoY respectively), these sub-sectors registered a monthly increase in September.

Core inflation (DOSM) reversed its course to register a modest increase of +0.3% YoY (Aug: -0.2% YoY). Major groups that influenced the rate were utilities (+2.3% YoY; Aug: +2.3% YoY) as well as restaurant and hotels (+1.1% YoY; Aug” +0.7% YoY).

HLIB’s VIEW

In the coming months, we expect prices to remain moderate as the upward adjustment in prices post SST 2.0 is expected to be offset by the diminishing contribution of transport prices due to base effect and fuel price subsidy. We maintain our expectation for BNM to maintain OPR at 3.25%.

Source: Hong Leong Investment Bank Research - 29 Oct 2018