Headline inflation was steady at +0.2% YoY in December, matching the pace in November and below the consensus estimate of +0.3% YoY. Inflation remained muted due to declines in transport and clothing & footwear which offset the rise in housing, utilities & other fuels, restaurants & hotels and alcoholic beverages & tobacco. For Jan-Dec 2018, CPI rose +1.0% YoY (Jan-Dec 2017: +3.7% YoY).

DATA HIGHLIGHTS

Headline inflation held at +0.2% YoY (Nov: +0.2% YoY), below the consensus estimate of +0.3% YoY. On a monthly basis, CPI moderated to +0.1% (Nov: +0.2%). For Jan-Dec 2018, CPI rose +1.0% YoY (Jan-Dec 2017: +3.7% YoY).

Inflation remained muted mainly due to a decline in transport (-2.0% YoY; Nov: -2.3% YoY) and clothing & footwear (-3.2% YoY; Nov: -3.1% YoY) which offset the rise in restaurant & hotels (+1.3% YoY; Nov: +1.2% YoY), alcoholic beverages & tobacco (+1.1% YoY; Nov: +1.0% YoY) and sustained increase in housing, utilities & other fuels (+2.0% YoY; Nov: +2.0% YoY).

The transport sub-sector registered a decline of -2.0% YoY (Nov: -2.3% YoY) due to a steep decrease in RON97 petrol price by 31 sen (RM2.50; Nov: RM2.81). This followed the decline in global Brent oil prices in November. Meanwhile, RON95 petrol price was maintained at RM2.20.

Food inflation slowed to +0.7% YoY (Nov: +1.1% YoY). This was driven by a sharp decline in vegetable prices (-4.4% YoY; Nov: +0.8% YoY) and decline in sugar, jam, honey, chocolate & confectionery (-2.0% YoY ; Nov: -2.3% YoY ), fish & seafood (- 0.1% YoY; Nov: +0.5% YoY), rice, bread & other cereals (-0.4% YoY; Nov: -0.3% YoY) and oils & fats prices (-0.8% YoY; Nov: -0.7% YoY). This was partially offset by the rebound in meat prices (+1.0% YoY; Nov: -2.2% YoY), milk & eggs prices (+0.9% YoY; Nov: -0.2% YoY) and pickup in fruits prices (+0.5% YoY; Nov: +0.2% YoY).

Services inflation moderated slightly to +1.7% YoY (Nov: +1.8% YoY) as the continued decline in communication (-1.3% YoY; Nov: -1.3% YoY), recreation services & culture (-0.2% YoY; Nov: -0.3% YoY) and moderation in education (+1.1% YoY; Nov: +1.4% YoY) offset the rise in restaurant & hotel prices (+1.3% YoY; Nov: +1.2% YoY).

Core inflation (DOSM) recorded a slight moderation (+0.4% YoY; Nov: +0.5% YoY), due to decline in clothing & footwear (-3.2% YoY; Nov: -3.1% YoY) and transport sub sector (-2.0% YoY; Nov: -1.6% YoY) that offset the growth in furnishing, household equipment and routine household maintenance (+0.1% YoY; Nov: -0.1% YoY) and steady growth in utilities inflation (+2.3% YoY; Nov: +2.3% YoY).

HLIB’s VIEW

In 2019, we anticipate inflation to average at +2.0% YoY, premised on the assumption of average global Brent oil price at USD68/pb, USD/MYR 4.1-4.30 and adjustment to SST 2.0. Nevertheless, inflation remains dependent on movement in global oil prices. In the immediate term, we expect CPI to record negative figures due to lower petrol price before moving upward to reach a peak in 3Q 2019 due to low base effect arising from zero tax holiday period in Jun-Aug 2018 period. Despite the low CPI, we maintain our expectation for BNM to retain the OPR at 3.25% for 2019 unless global activity deteriorates at a significant pace, negatively affecting domestic demand activity.

Source: Hong Leong Investment Bank Research - 25 Jan 2019