Headline inflation slowed to +0.2% YoY (Oct: +0.6% YoY), lower than the consensus estimate of +0.4% YoY. The moderation was mainly driven by decline in transport sub-sector. Due to slower-than-anticipated CPI growth, we downgrade our CPI forecast to 1.0% YoY (previous: +1.3% YoY) and maintain 2.0% YoY in 2019.

DATA HIGHLIGHTS

Headline inflation moderated to +0.2% YoY (Oct: +0.6% YoY), below the consensus estimate of +0.4% YoY. On a monthly basis, CPI held at +0.2% from the prior month.

Inflation remained tepid mainly due to a decline in transport (-2.3% YoY; Oct: +0.8% YoY), clothing & footwear (-3.1% YoY; Oct: -3.1% YoY) and communication sub sectors (-1.3% YoY; Oct: -1.5% YoY) which offset the rebound in alcoholic beverages & tobacco (+1.0% YoY; Oct: -0.8% YoY) and rise in education (+1.4% YoY; Oct: +1.1% YoY).

Price levels in the transport sub-sector posted a decline of -2.3% YoY (Oct: +0.8% YoY) due partly to a high base effect from a year ago. Additionally, RON97 petrol price rose by 2 cents (RM2.81; Oct: RM2.79) following the increase in refined oil prices. As an indication, MOGAS95 registered a rise in the previous month (Oct: USD89.57; Sep: USD85.96) while ringgit depreciated (Oct: USD/MYR 4.1595 Sep: 4.1383). Meanwhile, government decided to maintain RON95 petrol price at RM2.20.

Food inflation moderated slightly to +1.1% YoY (Oct: +1.2% YoY). This was due to a faster decline in meat prices (-2.2% YoY; Oct: -0.3% YoY) and slower decline in oils & fats prices (-0.7% YoY; Oct: -0.8% YoY). Prices moderated for vegetables (+0.8% YoY; Oct: +3.0% YoY) and fish & seafood (+0.5% YoY; Oct: +0.8% YoY). This offset the rebound in fruits prices (+0.2% YoY; Oct: -0.4% YoY).

Alcoholic beverages and tobacco rose by +1.0% YoY (Oct: -0.8% YoY) due largely to increase in cigarette prices (+2.4% YoY; Oct: 0% YoY). This follows British American Tobacco’s decision (BAT commands approximately 55% of legal market volumes) to increase shelf prices for all its cigarette brands by RM0.40/pack, effective 2 Nov 2018 following guidance from Ministry of Health.

Services inflation rose marginally to +1.8% YoY (Oct: +1.7% YoY) due to a rise in education sub-sector (+1.4% YoY; Oct: +1.1% YoY) which offset the steady decline in communication (-1.3% YoY; Oct: -1.5% YoY) and recreation services & culture (-0.3% YoY; Oct: -0.2% YoY).

Core inflation (DOSM) registered a marginal increase of +0.5% YoY (Oct: +0.4% YoY). The rate was driven by increases in food & beverage (+1.5% YoY; Oct: +1.3% YoY) and education sub-sector (+1.4% YoY; Oct: +1.1% YoY).

HLIB’s VIEW

Due to the slower-than-expected CPI growth, we downgrade our CPI forecast to 1.0% (previous: 1.3% YoY) for 2018 and maintain our 2.0% YoY forecast for 2019. Moving forward, in the first quarter of 2019, we expect the upward adjustment of prices post SST 2.0 to be offset by diminishing contribution of transport prices due to base effect and fuel price subsidy during the earlier part of 2019.

Source: Hong Leong Investment Bank Research - 20 Dec 2018