Headline inflation declined by -0.7% YoY in January (Dec: +0.2% YoY), lower than the consensus estimate of -0.4% YoY. The negative print was mainly due to declines in transport, clothing & footwear and miscellaneous goods & services price. Going forward, we anticipate that deflation will be transitory and prices will likely pick up as global oil price recovers and low base effect arising from the zero tax holiday period.

DATA HIGHLIGHTS

Headline inflation declined for the first time since 2009 by -0.7% YoY (Dec: +0.2% YoY), below the consensus estimate of -0.4% YoY. On a monthly basis, CPI contracted by -0.5% (Dec: +0.1%).

The deflation was driven by declines in transport (-7.8% YoY; Dec: -2.0% YoY), clothing & footwear (-3.3% YoY; Dec: -3.2% YoY) and miscellaneous goods & services (-2.4% YoY; Dec: -2.4% YoY) which offset the rise in food & non-alcoholic beverages (+1.0% YoY; Dec: +0.7% YoY) and sustained increase in housing, utilities & other fuels (+2.0% YoY; Dec: +2.0% YoY) and alcoholic beverages & tobacco (+1.1% YoY; Dec: +1.1% YoY).

The transport sub-sector sharply contracted by -7.8% YoY (Dec: -2.0% YoY) due to high base effect and declines in both RON95 (RM1.95; Dec: RM2.20) and RON97 (RM2.25; Dec: RM2.50) petrol price by 25 sen, following the fall in global Brent oil prices in December.

Food inflation rose +1.0% YoY (Dec: +0.7% YoY) due to rise in meat (+2.4% YoY; Dec: +1.0% YoY), fruits (+1.4% YoY; Dec: +0.5% YoY) and rebound in fish & seafood prices (+1.2% YoY; Dec: -0.1% YoY). This offset the large contraction in vegetable prices (-7.9% YoY; Dec: -4.4% YoY), sugar, jam, honey, chocolate & confectionery (- 2.3% YoY; Dec: -2.0% YoY) and sustained declines in oils & fats (-0.8% YoY; Dec: - 0.8% YoY) and rice, bread & other cereals prices (-0.4% YoY; Dec: -0.4% YoY).

Services inflation recorded a slight uptick of +1.8% YoY (Dec: +1.7% YoY) as the slight moderations in restaurant & hotels (+1.2% YoY; Dec: +1.3% YoY) and education (+0.9% YoY; Dec: +1.1% YoY) offset the declines in recreation services & culture (-0.4% YoY; Dec: -0.2% YoY) and communication services (-1.2% YoY; Dec: - 1.3% YoY).

Core inflation (DOSM) moderated to +0.2% YoY (Dec: +0.4% YoY). This was due to declines in transport (-7.8% YoY ; Dec: -2.0% YoY), clothing & footwear (-3.3% YoY; Dec: -3.2% YoY), miscellaneous goods & services (-2.4% YoY; Dec: -2.4% YoY) and furnishings, household equipment & routine household maintenance prices (-0.3% YoY; Dec: +0.1% YoY) which partially offset the rise in food & non-alcoholic beverage prices (+1.7% YoY; Dec: +1.3% YoY).

HLIB’s VIEW

Going forward, while there is downside risk to our CPI forecast, we do not expect deflation to sustain as we anticipate price levels to pick up gradually following recovery in global oil prices and low base effect arising from the zero tax holiday period in Jun-Aug 2018. Despite the low CPI, we maintain our expectation for BNM to retain the OPR at 3.25% for 2019 unless a significant deterioration in global activity negatively affects domestic demand activity.

Source: Hong Leong Investment Bank Research - 25 Feb 2019