Headline inflation ticked higher to +0.6% YoY (Sep: +0.3% YoY), matching the consensus estimate. The uptick in inflation was supported by a rise in food & beverages, transport and restaurant & hotels 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 registered a slight uptick of +0.6% YoY (Sep: +0.3% YoY), matching the consensus estimate. Inflation rose +1.1% in Jan-Oct 2018 (2017: +3.7% YoY). On a monthly basis, CPI moderated to +0.2% (Sep: +0.4%).

The uptick in inflation was mainly due to a rise in food & beverages (+1.2% YoY; Sep: +0.5% YoY), transport (+0.8% YoY; Sep: +0.3% YoY) and restaurant & hotels (+1.2% YoY; Sep: +1.1% YoY) which offset the continued decline in other sub-sectors (clothing & footwear and communication).

The slight uptick in global oil prices (USD80.63; Sep: USD79.03) and weaker ringgit (USD/MYR 4.1585; Sep: USD/MYR 4.1398), resulted in higher RON97 petrol prices during the month (RM2.79; Sep: RM2.65). Meanwhile, RON95 petrol price was maintained at RM2.20. Consequently, price levels in the transportation sub-sector grew +0.8% YoY (Sep: +0.3% YoY). According to a report, Domestic Trade and Consumers Affair minister Datuk Seri Saifuddin Nasution Ismail shared that targeted petrol subsidy scheme will be implemented in stages in the second quarter of 2019. The fuel subsidy will be targeted at the B40 income group, and not for owners of multiple and/or luxury cars. The subsidy scheme will offer a subsidy of RM0.30 per litre up to 100 litres a month, for cars with engine capacity 1,500cc and below. In addition, government will also offer subsidies of RM0.30 per litre up to 40 litres a month, for motorcycles of 125cc or less.

Food inflation grew at a faster pace of +1.2% YoY (Sep: +0.5% YoY). This was due to rebound in vegetables prices (+3.0% YoY; Sep: -1.2% YoY) and higher fish & seafood prices (+0.8% YoY; Sep: +0.4% YoY). This offset the decline in other sub-categories. Rice, bread and cereal prices continued to decline, but at a slower pace of -0.3% YoY (Sep: -0.5% YoY). Meat prices showed a similar trend (-0.3% YoY; Sep: -2.3% YoY). On the global front, global food prices declined by -7.4% YoY (Sep: -7.6% YoY).

Services inflation rose marginally to +1.7% YoY (Sep: +1.6% YoY) due to a slight increase in restaurant & hotels sub-sector (+1.2% YoY; Sep: +1.1% YoY) which offset the slower decline in communication sub-sector (-1.5% YoY; Sep: -1.6% YoY) and steady decline in recreation services & culture (-0.2% YoY; Sep: -0.2% YoY). Core inflation (DOSM) registered a marginal increase of +0.4% YoY (Sep: +0.3% YoY). The rate was influenced by modest increases in food & beverage (+1.3% YoY; Sep: +1.0% YoY) and restaurant & hotels sub-sector (+1.2% YoY; Sep: +1.1% YoY).

HLIB’s VIEW

Moving forward, 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. Based on our expectations of moderate growth in underlying demand, we maintain our expectation for BNM to maintain OPR at 3.25% until end-2019.

Source: Hong Leong Investment Bank Research - 26 Nov 2018